.- OR -2) Wait for the homeowner to miss one payment and foreclose on the property, thereby buying something for a deep discount if you don't mind going through the courts to eventually own the property.Has anyone seen this type of negotiation/deal with lenders?

My plan is to buy and hold locally near where I live in CT but the idea of vacation rentals appeals to me very much, some day!

One morning  I was walking around picking up trash and looking things to make my property have more curb appeal.

To me it is not an appealing deal at all.

They now consider that my partner has no cause for a hardship exception and, with the rental cap met, they are not entertaining requests to rent - the rental wait list is about 1 year.We are preparing an appeal to the members of the board since according to the declaration, the decision ultimately rest with them, but we are not optimistic about the prospects of them deciding this in our favor.

Dan,I've bought several house in WA at Trustee Auction (auctions at the court house steps).  

I stopped by the local courthouse for info but they were very vague and I was under the impression evictions happen any day any time so It wasn't a day they recommended I sit in court on to talk to landlords.  

If it goes to eviction court, perhaps a reasonable judge will see it that way as well.Best of luck.

the penalty of violating the Ability to repay rule is 36 monthly payments, down payment, lawyers fees, and court costs. 

Even if you don't qualify for what you'd hoped, a good lender should be able to help you figure out ways to make yourself a more appealing borrower.