As long as both owners are notified and served with the foreclosure, then the entire title should transfer to the buyer.  

Do we have to show proof to the buyer that he has settled the capital gains tax and/or provide the IRS certificate? 

There are also potential warranty issues.

Option 1 allows you to spread your investment across three properties, considerably increasing your rental revenue and accelerating portfolio growth; however, maintaining several mortgages can be difficult, potentially limiting your cash flow, especially if one property is vacant.

It will be up to you to vet the potential deal sponsors/partners and Underwriting properly to make sure it's a good fit.

The reason for this reduced value is because the buyer pool is substantially smaller.  

Debt Service Coverage Ratio loans (DSCR) utilize the potential property income for qualification, not your own.

You will see this in seller finance or subject to deals where a seller does not want to go through a long foreclosure process if something happens to the buyer(death, abducted by aliens).

Hey Everyone, I've been building an Excel financial model that can quickly analyze potential value-add multifamily projects and I've run into an issue that I wasn't expecting - when calculating the returns, do you take into account both the refinance and sale proceeds, along with the cash flow?

If you want to use leverage 2-4 units probably gives you more financing options and also widens your pool of buyers for exit strategy.