On the other hand, if its a lost cause, what would be good advice for him ?

It sounds like you already have an acceptable offer that would solve your friend's problem and allow her to get out from under this house that is causing her so much stress.

Additionally, you will have set the precedent that you're allowing your tenant to perform repairs on the property, potentially opening up legal issues later if the tenant does further repairs without your permission and causes a problem (or gets injured).I'm not an attorney, but I've had an attorney recommend NEVER to allow tenants to do repairs, and to even put in the lease that they aren't allowed to perform any maintenance.

I've heard stories about property managers being nightmares for other property managers because they know all the ins and outs and can cause trouble, but I wouldn't trip out.  

Honestly not fixing appliances even if the lease says as is is hard to do without causing issues.

Hud has a billion horror stories, i'd be lying though if i said it didn't cause opportunities at times.

Because my input is that you should not be wrapped up in this deal, you cannot afford this house.If a lender tells you that "you can afford" $375k for your primary residence, you should be shopping for homes in the $275k-$300k range.What you've done here is maxed out your debt-to-income ratio to the point where just a small spike in interest rates has caused you to not be able to afford the monthly payment.

Life circumstances caused us to push pause on the short term rental for now.

In this section of the book, Brandon lays out 7 types of tenants you don’t want to rent to because they’re likely to cause issues. 

We would do the construction and end loan, so I will cause a lot of issues with underwriting and you can potentially get in trouble for misstating on the initial construction loan.