The only other options I can see are A) your mom partnering with you rather then selling the property to you - you become 50% owner and bring the funds and management to the rental while she provides the existing equity as her contribution; or B) your mom lending you the rehab cash out of her personal funds while also seller financing the house to you. 

If you are going to be an owner-occupant, want a low down payment, and are planning to do a renovation, the FHA 203k and Fannie May Homestyle loans are your best optionsHow do you know the property is currently upside down on the mortgage? 

Unfortunately, the previous owners used the same lease for this garage space as they used for the residential units. 

They probably want to be certain YOU are legit.Most of the scams I've seen are by non-owners. 

@Brett Coultas if you're a newbie, you want to be careful of an "investor friendly" agent selling you something they truly don't understand:(95+% of agents only know how to handle owner-occupied transactions - you can verify this by asking them calculate ROI for you or Cash-On-Cash!

While I have a fantastic rate, the co-owner's giving me the option to refinance or he'll force a sale.

It’s time to look into home owners/rental insurance.

If a property goes into foreclosure on a second, as Ken said you will either be buying it subject to the first mortgage - meaning it's your mortgage now - or the first has to be satisfied to take possession of the property - or the owner of the first is going to be there bidding what they are owed, so you would need to outbid them to get the property and then you are the person paying off the first mortgage. 

It looks like according to the county site (sbcounty.gov) they require all renter payment go to the active owner. 

One with low cash, one with some owner financing and a little less price.