REP would come into play if you have losses - expensing items creates a larger net loss and REPs losses aren't capped at passive activity income.

It can be a pretty big deal and isn't anything worth playing with. 

I assume it's in the lender's best interest that I close after this policy comes into play, or is that not the case?

We did research on area and we knew there are bad elements but i think we underestimated the problem (You know mind plays with us when we have already decided to do something especially when you have overconfidence on yourself ).

Cheers

A kid playing outside can break the window and you will collapse in tears. 

So I was unsure if that would play a role and should have mentioned that.   

Cheers...

Cheers Everyone and let's find out how do you find the current situation and what is your biggest challenge to make the things work?

The plan would be to have 2 separate purchase contracts with closing of the 2nd property to occur after closing the owner-occuped FHA loan. 2) I'm now trying to evaluate a commercial loan for the 2nd (or both properties), but not sure how that could play out yet.