If you find a qualified applicant you can transition without losing any rent.

So a 50k loan at 2 points makes them 1k in fee's  that's a ton of risk for such a small loan and if it turtles you can lose half your money in that market no sweat.. that is the other major hurdle. 

I may lose the deal because I might be competing with a retail buyer but it is what it is

@Brie Schmidt can't deduct 100%, Joe A. the interest on your excess funds ($5k) is the portion of the debt that will not be deductible under the tracing rules.

Now excessively high fees are on most buyers list, and can turn off a home buyer. 

Worst case scenario, don't get paid for 3 years and have to spend some money to foreclose.How can I lose?

Don't lose that positive attitude and keep moving forward!

It seems a shame to lose the whole deal and over 1k between my EMD and ext. fee all because of these technicalities.Any advice would be greatly appreciated.  

Then as your more familiar with the area and maybe even lock up a willing seller with a long term contingency, do another round of 1031s into the ideal property then.That way you don't buy the wrong property but you also don't lose the tax deferral.

so you could lose $30 - $40,000 above the value by doing the work and holding costs during that time, or lose $20 - $30,000 selling it to an investor for $10-$20,000. how much more are you willing to lose on the property just to hold it ?