It is all about if it will helps the sale, in price or time it will sit on the market  which it ultimately comes down to money because of holding costs. 

Where did you underestimate costs?

Unfortunately, I did not verify the information provided by my agent regarding HOA restrictions and home insurance costs.

I'm pretty sure that the cost to get this done is not cheap!

Depending on location they can cost a lot to replace but when you factor in what you save from paying sewer bills it’s cheaper in long run.It would not stop me from buying a house

Can try to reposition to Class B, but neighborhood may impede these efforts.Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years.

That is a lot of negative cash flow.Adding the ADU will have cost and effort but should improve the negative.  

After researching, we found that converting a single-family home into a duplex could cost around $200-300k.

It cost us $3,000 to demo the shower and retile it.

Shawn - I would suggest you develop a pro forma based on the stabilized state of the property to understand if it cash flows once all units are occupied being sure to include all reasonable revenue assumptions (rents, vacancy factor, etc..) as well as expenses (debt payments, maintenance, utilities, property management, taxes, insurance, turnover costs, etc..)