I'll tell you from experience, in Jersey HOAs are likely to destroy any chance of you cash flowing.

If he has a full time job that pays well, chances are he's working long hours and doesn't have a lot of time. 

In my experience, as it is a loan estimate, there is a chance that fees will reduce slightly from the overall closing costs.

Sure, they are low down payment, but that comes at a cost, not just in loan fees but also in paying a higher price to convince the seller to go thru all the hassles.To tie this into your question, the better price you pay and the lower loan costs mean you will have a much better chance of cash flowing positively or losing less. 

And if there's a chance that a business decision will ruin your relationship, don't do it.

Should I walk away from this investment or take the chance and be in good shape if I can get it rented?

So with the option recording, there is a chance that the owner looses the Homestead/Homeowner exemption and taxes are adjusted accordingly, Correct? 

At some point you will need to make a deal, talk to a bank, borrow money, or otherwise convince someone to take a chance on you.  

There is always risk but I strongly believe if you have done your homework, your property is up to code and you are a diligent landlord you have very little chance of having problems. 

I feel that this will hinder her chances of being a long term tenant.