I paid $2000 over asking because I knew it was a great deal, wouldn't stay on the market long, and wanted to make sure I got the property.

Am I crazy to want to offer her what she paid for the property?

You need to know who paid what and where the money went.

I plan to by 1 property in year 1, 2 in year 2, 3 in year 3, and so on with a final goal of 10 properties paid in full all generating passive cash flow.

Work your number backwards and get a pre-approval to figure out what you can afford!

Sellers will give an advantage to pre-approved buyers over other buyers who are just kicking tires.

As long as that $3500 is paid at closing, and not an "up front fee".

But he hasn't paid taxes this year, but it's California, so the taxes wouldn't cause foreclosure for a year or two more.

I agree with most comments above, it is very likely you will have the property in your possession again in a few years, the other issue is, lets say you apply $200/mo of the rent to principal, because the tenant is "renting to own" Fannie Mae, Freddie Mac and FHA do not recognize the additional rent paid to principal for down payment, because they lend on the purchase price, and no matter how you word it, they will not accept $10 or $20K as Down payment for the loan if it was paid to you over time. also if you need to remove them from the property it is possible a judge may see the principal payment as equitable interest in the property, there are many hag ups in this strategy. 

I met with a FSBO today who bought a property for 90 k a year ago that needs 80 k in rehab, but most of the comps are at 150k. Owner can’t afford the full rehab. A business partner recommended splitting rehab costs wi...