He recognizes & acknowledges who has the power, learns the hot buttons, gets in harmony with the horse & simply guides & encourages - nothing more.That is the job, guide & encourage the client & remove your selfish need to be recognized as a hero of sorts or you must win because in the end, your interests have zero value.Where negotiations breakdown is when you the negotiator starts injecting ego & other insecurity emotions, which creates resistance. 

I also recognize I will be 100% financing the deal thus take 100% of the financial risk.

I agree with @Jerry Padilla that some zip codes are definitely more desirable than others (and the definition of 'desirability' varies from investor to investor for multiple reasons), so make sure you know where you are investing and recognize the different returns you can anticipate based on these areas.  

I recognize the vast difference insurance costs between property types and location.

You'd have to recognize 1250 gain of course but you wouldn't have to prorate for NQU.Moving back into a property that has been a rental blows the exception. 

Do detailed scopes of work and do detailed release schedules that match obvious progress points that a homeowner easily recognizes.

With that being said I also recognize my own fault in analysis/paralysis. 

My initial thought is that the seller would have to treat this transaction as a sale of property and recognize any long-term capital gain recognized from the deal at the time of the transaction. (100% gain recognized up front, assuming no 1031 exchange is utilized).

Your initial entry is almost correct - the entire $39k would not go to the deferred gain, as a portion of the gain would be recognized. 

All of his concerns are irrational so I recognize he may have issues.