It’s a win-win for us we get full price without a commission closing costs,they get a dream house in their neighborhood that they want for their kids and while they rent for a while and then buy it.”So I take a lot of time with the seller to try to get them to think this way.It also avoids buyers remorse, where the seller says “oh my God what I just do???

A local realtor said the 1 bedroom unit could easily rent for $800 and the 2 bedroom $1200.

Your small $ margin on these can easily be eaten up in costs. 

My mortgage payment would be very low and I could easily manage one door that I was living next to.

Your question is if the sellers subordinates to the HML so you can get rehab funds and said lender wants to be in first ( demands) and your seller is in second ( subordinated) if it goes TU what happens to the Seller's subordinated interest.I think that is what your trying to say.Well the seller ( who has a subordinated interest) is in second position if the first forecloses the second ( seller ) needs to cure.. either pay it off or pay the payments. this would mean you defaulted as the buyer .. they keep first current and foreclose on second they end up owning the property subject to the first.. and you are out in the cold.Very dangerous position for a seller. one I would never personally do or recommend unless seller is very cashed up and can easily take project from you and pay HML off in cash.the most dangerous lending position is subordinated loan to FTD construction loan does not get much riskier and if they go to an attorney for advice I highly doubt they will do the deal.

You can easily wash, rinse, repeat this tax strategy and never pay tax on your gain or the value if your labor embedded in the value of the house.

A good deal is when it's a win-win, so both buyer and seller usually compromise on something. 

No investor would buy this from you when they could just as easily get something similar (and probably cheaper) by looking on the MLS.  

install Kwikset smartkey locks (home depot and  Lowes carry them) and then you can easily change keys between tenants.

This could potentially and easily save/earn you an extra $1000-$2000 a year.