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.

There is a pretty good chance you will have to deal with this same issue over and over again unless you can make a good friend with someone on the HOA board.

They also see it as a slim chance to get the deal done so they lack the confidence to really work with you.

Also, based on his experience he probably knows that the chances of having 5 offers accepted can be low depending on how much you're offering versus how much the Seller is asking.