So when the deals are happening then buyers have lot's of cash stuck in properties with low or no leverage that are hard to access.The one that used long term debt at higher LTV's now has more cash sitting on the sidelines for the down turn to scoop up properties and has to rely less on financing to make it happen.

As a personal home, maybe, but not as an investment.The cashflow is so low that one thing could wipe you out for the year (you don't have CapEx figured into your expenses BTW).

Renovated 3/2's were selling in the high 4's low 5's but there were no comps for 2/1's. 

They are all about keeping your prices low and butts in the seats no matter how fancy the property. 

you have to assume the worse and bid accordingly (very low). 

You will have negative cash flow and will only be able to rely on appreciation to profit....extremely risky.Additionally if plan A is a serious option for you then you are a very low risk investor and may want to reconsider directly investing in real estate and may be better off putting your money in a REIT.A investor, assuming they have the ability to move, would sell the CA property and move their money to where it can actually produce positive cash flow.

Have you read The Book on Investing in Real Estate with No (and Low) Money Down by @Brandon Turner? 

You won't get any tax reduction from it, only more tax hassle (paperwork wise).

Also consider low flow shower heads.

If I refinance as a owner occupy they will give me 85 in most cases 100% of the appraised value added low APR.