I heard that families with small kids prefer one story homes because of children safety, that is why I am not sure if investing in a two story home is a good option even if it may be a less expensive option.

Those seem to be in need, as there are very few 5+ bedroom options. 

Weigh ALL your options.  

There seem to be a market that attracts alot of travelers, is airbnb a good option here? 

It is a very stable and mature type of business IMHO.Frankly just providing the best service with a lot of options is the best way to succeed I think.Like @Andrew Steffens does.

You would have to explore other purchasing options like putting down a sizable down payment to bring down PP, ask the seller if he/she would be open to seller financing at a lower borrowing rate on all or some of the PP, work with a partner who could put up some of the money, etc...To provide a more simple resonse for this example, PP X CR = NOI.

Just trying to get an idea of what a hard money loan would look like in my case, and if it is a good option.

After looking into the question of whether or not to create an LLC for our investment properties, we decided the better option for us was to simply get more liability insurance, specifically an umbrella policy to cover all properties up to a few million dollars. 

If you need investor-friendly lenders to talk about your financing options, let me know and I'll get you connected.

Your best option is to settle with them since they are making a good faith effort to settle the debt.