If you didn't do the reduction and let it sit vacant for another month or possibly longer, you've lost $2000+.3.

Is it possible to have denser development?

I actually recommend house hacking as a first step if possible. 

Make the land as inviting as possible for the location.

What could possibly go wrong?  

You are right, when the inspector mentioned the possibility or prior water damage is when you should of had that basement inspected by a contractor/professional and not listen to your agent.Gregg is right, the sellers were aware of some of the damage which is why they gave you a 5K credit. 

Quote from @Jason Malabute: A 1031 exchange is possible.

Quote from @Rose White: When is the best time to ask your new / possible future tenant for a background check?

I would get with the city asap and find out all the details on this.It could be possible that if the LLC changes hands that it loses it's exemption.

Finding a lender that offers a HELOC on an investment property can be a bit challenging, but it's definitely possible.