I suppose ideally we would like to get turnkey properties, especially due to our lack of experience. 

Remember to factor in the costs of dissolving the Association in your decision. 

It's not difficult to do, but would just be ideal if all the communications (including FPI letters) came from the servicer..

The fire incident report says that it was oil at the stove that started the fire and added "alcohol / drugs" as a human factor.

Does this mean that he property value has gone up and can be sold, ideally for 30k more?

He has some small dumpsters that are ideal for the situation you are describing.  

The other is a stabilized cash flow opportunity in the suburbs.While location is a very strong component of real estate that always needs consideration, it is also one of many factors.  

If you have a closet that's all you need and you should definitely close the wall off so it could actually be used as a bedroom.  10'x10' is very common bedroom size in Chicago, although its not ideal it can easily fit a full soze bed with extra room.  

The house itself looks decent, but the external factors (neighborhood, multi-family) are your problem. 

Ideally you want portfolio lending, even though it may not help you on this purchase, the relationship you build will help with future deals.