As I've been having issues with WaMu's appraisers, my loan officer mentioned that in areas which are considered "declining markets", WaMu reduces the appraised values by a certain percentage.

I have read HML try to get 20% returns by charging inline with 4 pts with 12 - 15% and recycling the money twice a year (points paid twice + interest collections).You might be able to squeeze a bit out after you've done a few and have a relationship, drop the interest a point or two and maybe reduce the upfront points one or two... but on a new relationship, your 1st flip...

I'd at least try to negotiate a reduced payoff.Let us know how this turns out for you.

This is a numbers game, so if you didn't leave any room on your offer, you either have to stand firm, or reduce your profit margin.

Don't reduce your rent by too much.  

This reduces another costs.

Largely, it reduces the cost of forming an LLC for each property.

Do you reduce the risk if you occupy the unpermitted unit?  

We also offered him a deal that if he signed another year lease we would reduce rent to match market rates of $1100.

So, if we were to work together we would focus on locking up your first property and reducing your anxiety.Did I understand your situation correctly?