The only growth path would be tearing down and redeveloping, resulting in high new home prices.

She does not take very good care of the property and has three dogs  that are tearing the place up. 

The owners may be able to get it permitted but I have seen this come up before where the building department told them to tear it down.  

After they moved out the property needs obvious work: carpets weren't cleaned, there's holes in the walls due to fixtures and wear and tear.

Currently working through how much this is going to cost me (initial quote was for $5k) but Bridge has refused to provide any support, stating that due to the fact that a tenant had lived there for a year that it could be due to wear & tear and they would not be helping out.Without getting into nitty gritty about how long LVP should last for, needing to replace all LVP after a year, in my opinion points to improper installation not normal wear & tear.

It offers all the same benefits as STRs, but you don't need an STR permit, most HOAs allow them but don't allow STRs, there's less management since you have 4-5 guests/year instead of 3-4 guests/week, less wear & tear since your guests will almost always be couples or small families vs STRs where guests pack in the maximum occupancy...

They are hesitant, however, to have the bath addition permitted, because they fear that the city will make them tear out the entire bathroom to inspect the plumbing.

The town might make you tear it all out and start over.

Would the new owners be responsible for this if they have to tear down ceilings, etc.?

I just had to tear four of them down.