(Basically you have to have your selling price laying around in cash to lend to the buyer.)You could try something like give me X (10-20% of the selling price.) and then make ent payments of “Y”.

I am banging my head against a wall trying to figure out how to best scale.

I would try to make sure a title company is involved, because if you go to sell it later, the title company for the sale may be too conservative about deeds that were recorded without being part of a title insurance policy, if that makes sense. 

We don't want a lot of turnover right away and since we're living there we want to try and keep the peace.

You definitely aren't going to have a great predictable return, especially in the short term, if you try to invest turnkey; at least at the single family and small multi-family level. 

The first unit needs a little work but I think I could rent for $1000/month in general and that is what I told my friend I would rent to him at.He hasn't submitted an application because he told me he's trying pay off some overdue parking tickets and just wants to be in a better financial spot before committing.

It is a conventional loan product so must qualify for that.It always you to finance up to 97% of the land and the construction loan with "one closing". 

As an appraiser, I am merely trying to see the market reflections of what a buyer would most likely pay for a property.

A wise investor will not try to get rich quick with shortcuts.

So my question is do I sell and take a loss of 35-40k, try to long term rent at around $2000/ month and pray for appreciation?