We also know the property is currently occupied by the owner, and the retail value is probably about 2x to 3x what is owed.

While he continued to spend every dime he could find, I found ways to beg and borrow (not steal) money for repairs and upgrades until we finally had a house that was only slightly crappier than everything else on the block.With the inevitable divorce several years later, I found myself massively in debt with an ex-husband refusing to honor any of it, but a house worth almost twice what we paid for it.  

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What's the downside to buying the building, and renting to students compared to a massive conversion product to sell units individually to people likely to rent them?

Credit companies get the info with a time lag …and an uncontested foreclosure in IL is pretty quick…8 months and 1st position is available for sale.The returns and cash flow, obviously.If you're buying foreclosure sales you're looking at inventory where the 1st mortgage is being foreclosed, which retail buyers of 2nd mortgages try to avoid for the exact reason you mentioned - they would get wiped. 

Do you know what something like this is going for at retail (ie owner occupied)?

I've done the same thing to learn how to develop condos, apartments, mixed use, office space, retail, and hotels. 

While speaking with him I stated that the house priced at retail and I was looking for a number much lower and I threw out a number around 35,000,mistake?

The 3500 square feet are on a massive corner lot, so there's lots of parking, and the zoning is great at 0-3, so it is actually now okay to be residential multi family or even live-work spaces. 

There are some beautiful properties there but they involve massive risk.