As a buyer, I can tell you that it definitely is a red flag.

If you get solid contractors who can do repairs, and teach the tenants to send you pictures and video when things are wrong so that you don’t have to make a trip to check, and then this could still be pretty hands off for you despite self managing it.Plus if you increase the rent by a couple hundred dollars a month across the four units, then now you will be looking at around $700 a month in cash flow, which is great.Plus your vacancy allowance might be a little on the high end, but even if not the deal should still make sense.The only potential red flags are if this area is difficult for filling vacancies.

There is lots of paperwork and red tape.

Wouldn't this raise red flags?

If you're very cash flow positive and a HELOC won't turn your cash cow dry, then tapping the equity to invest elsewhere for positive cash flow wouldn't be a bad thing.If you are just breaking even or only slightly cash flow positive, a HELOC, when tapped, will put you in the red. 

I don’t know what to make of this but my gut says it’s a red flag even though both properties meet all of my other investing criteria.

Even red necks fools and old people know what they have these days and expect to get paid .

The part in the red bracket is where I am confused.

Other than that, usually there is no upfront costs to be paid.Other than these; if they ask you send money for processing upfront; that is a red sign. 

You have plenty of red flags and obviously see them.