That is a long time to hope nothing catastrophic happens.Finally, we are somewhere nearer the top of the real estate market than the middle so over the next couple of years you may gain even more negative equity.Why take that risk?

Well, it is NOT.As someone above mentioned, over pricing a home is a real bad idea and in a competitive market, you can't underprice a home as buyers will bid it up to what they believe is the market value.Someone should create a show of catastrophe flips by rookies who watched too much HGTV!! 

I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses.

It's cheap insurance against possible catastrophic disaster.

Since this appears to be an older home I would take the 3.5% down route and have extra cash in hand in case some catastrophe occurs. 

That's common sense.To answer some questions, an oil tank removal in NJ should be 1500-2000 and if it's dry, that's that. 90% are clean and of the 10% that have a leak, only 10% are catastrophic.  

I reserve insurance for only the worst most catastrophic situations.

I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses.

An ejector seat will protect you in the event the jet has a catastrophic failure and you need to ditch it, but it won't help for a "check engine light."

Flooding is a catastrophic event and the cost of coverage is generally very reasonable.