@David Krulac  tax sale   foreclosure out your way is SOOOO much more complicated than what we deal with on the west coast...

It really isn't very complicated.  

I've ran through countless analysis calculators and I tend to think I'm over complicating the deal.  

I'm assuming they didn't get the proper permits to do this,therefore; I'm a bit leery into pursing this as I don't want any complication arising from renting out the first floor as an apartment and maybe having a neighbor or whoever turn me in.

And if he is tying it together, sales and management, then you'll want to limit complications going forward and make certain that if you want to choose another management company after the sale, there won't be any issues.   

It is pretty customizable and can be as simple or complicated as you wish.

But if it's signed by anyone other than the party that has/had an ownership interest in the property, proper notification hasn't happened and the clock on the redemptive period doesn't start until "proper" notification happens.The more heirs, the more complicated this gets. 

If I plan on picking it up as a buy and hold rental and I can generate positive cash flow at $135, even though its over the FMV, would it make sense, given the time, headaches and complications of a short sale to pay what's owed or should I offer the $125?

To me, it seems like a complicated math question. 

@Bob Romano If the house took a month to sell, then I would fix all the items she's requesting if none are overly complicated or too involved to address.