However, she made the other tenants in the building very uncomfortable and would let random homeless men in to sleep in the hallway.  

I know very little about Fargo, ND and as to whether there are attractions there where people need sleeping accommodations. 

It will be a huge asset to sleep soundly when values drop again at some point and not have to worry about being over leveraged. 

If they need replaced you can get new units in there and sleep well for 10+ years.

Its better to make the slower decision and pay off debt if the thought of over leveraging will prevent you from sleeping at night!

It's basically a converted motel so each unit has a kitchen/dining room, a hall with bathroom, and a living/sleeping room with a walk-in closet.

. - Minimum housing standards.No person shall occupy as owner-occupant, or let or sublet to another for occupancy (for compensation or not), any dwelling or dwelling unit designed or intended to be used for the purpose of living, sleeping, cooking, or eating therein, nor shall any vacant dwelling building be permitted to exist which does not comply with the following requirements:(w) Screens.

Don't cut it so close you can't sleep at night.You may be able to get the 3-unit under contract with a contingency of selling your flip, but that will probably make your offer less competitive.Otherwise, I would wait until you at least have your flip under contract (and have a more precise expectation of net proceeds) before going shopping again.The 3-unit property is not a one-in-a-million opportunity that just happened to pop up right now. 

if the answer is less than 5, go to the next person who specializes in these type of loans and can do these in their sleep. 

Like you said, it may reduce your actual rate of return, but sounds like you sleep better at night as well...