Then they fail there occupancy inspection and end up selling the property for a loss or spending 40K to fix everything.

You can keep it in your portfolio and acquire a few more to maybe offset your losses.

The sale price is $10k more than retail comps in the area (maybe even after adjusting for the garage and other items you mention) and it needs work.

I'm new to running this type of analysis so bear with me.In calculating the NOI, I've seen examples where the major expenses (taxes, maintenance, insurance) are still counted as an expense to the owner (even though commercial leases are typically NNN) and then it's balanced out by a line item to the income for 'tenant reimbursements' which is essentially the tenant paying the owner back per the NNN.Every example I've seen has the tenant reimbursements be exactly equal to the expenses such that it's a net zero to the owner.

Apparently she got about $400,000 after the fire and being an out of state landlord she decided to cut her losses and move on by giving the property to the claims adjuster. 

If thats the case, just fire the PM and get a new one.If the lawyer is to begin the eviction process, again, thats something a new PM can probably handle.Sueing a PM isnt likely to do much, so you will not have much of a tangible loss.

The deferred maintenance arent major items but they need to be taken care of....landscaping, replace some sod, paint the exterior, minor drywall repairs, replace a shower door...overall the house is solid.

Sales tax exemption is for those purchasing items for resale, where the sale tax is taken at the point of resale(or for non-profits like churches)You do not collect sales tax when you sell the flip(or flop)

You could easily end up selling the house at a loss in 5-10 years, as Paul mentioned.

well sometimes we have short memeories or your young enough to just be getting starting in RE business.2 things happened in phX that tanked those values.. 1. politics kicking the illegals out.2. building stopped tenants leftMuch of this housing was and is hispanics they were fleeing back to mexico for political reasons and because new contruction stopped loss of job was huge.so you had 4 plex's go vacant or only have one or 2 tenants.And of course the dreaded turn over which always cost money along with under capitalized owners in many cases could not afford negative cash flow along with turn over expenses led to a melt down.things have rebounded... same thing happned in Vegas with the 4 plex's there.