It is not that you can't rebuild, the rule requires that you must bring the structure into conformance with the updated flood rules. 

Is she entitled to previous joint returns with her ex if that is required? 

If the water bill is $100 a month, increase the price by 20% (or whatever you decide is fair) to compensate you for the time required to split and bill and to cover additional use when tenants squander the utility.

It's a lease agreement until the requirement is fulfilled.

Ask questions, get to know the renters, and document the condition of each rental so you have a record from that point forward and can hold tenants responsible for damages.Your offer to purchase should include a requirement that the Seller provide all documentation and agree to sign an estoppel certificate (also called an estoppel form or agreement).

Especially with most units requiring 3 different paints/colors: walls, ceiling and base/trim/doors.

I am not suggesting you can't acquire a BRRRR home (although it's more difficult right now with the higher interest rates), or you will necessarily fair better with the purchase that requires you to leave your $40,000 of capital in the property.

I'm wondering if anyone has been successful at closing with this type of loan product and if so, what factors (credit/DTI/reserves, etc) were required for you to be approved?

The ability to make a cash offer and the absence of steps required to obtain hard money makes it easier.

This kind of revelation requires legal action.