You should also consider whether you want to sell the improved lot or rent it out as that will have a huge impact on your decision.

They handle all of the legwork, you make the final decision, and you essentially exchange time for x value, which depends on the firm and the individual deal.

If I make the decision to sell this property and take those profits and buy several land contracts (homes for sale by the owner through land contract agreements) will I be able do a 1031 exchange?

Could be the fear of going into a large investment alone that stops people from making a decision.

First of all, I would make the decision from a zero basis. 

I will ask my mortgage broker if the vacany made a difference in the final decision but I believe the decision was made assuming the grandfather status was still in place.

So my decision basically comes down to easing into being a landlord and rent my current home (est. $300-$400 cashflow) or leverage my current equity to try and get something that cashflows more and jump right into the deep end (assuming I can find a deal that would cash flow higher). 

Don't make an irrational or uninformed decision, but just be ready to act quick, making sure you have all your ducks in a row.  2) If you know you want to stay in the northern suburbs, then perfect!

Problem is that every time he tries to get a Fannie Mae loan, it seems the lenders can't figure out his financials even though we package it and give them everything they need in order to make a decision.

I wish you well but I'm curious how this factored into your decision?