Should I change the tile or restore? 

A fire & Water damage restoration company like ServPro or ServiceMaster may be help full in this. 

I have hear about ReStore, scratch-n-dent models from big boxes, and then of course craigslist.

Something that will help you out a little more is to go and get a inspector to check out the house and tell you the worth now and the worth when it is restored, just make sure that you can repair and sell in under a year or you will be hit with a large intest rate. 

Maryland also charges stormwater fees and bay restoration fees along with our water and sewer, for example.Between water and municipal fees (if in fact just sewer charge) that gives you $938/unit on water.

I work in Emergency Restoration, so we drive around the city a lot, and the first piece of advice I got was stay away from I-26 south of the city.

You're playing with Fire and could potentially get burned badly.At this point the bank is almost irrelevant because they don't own the property,the seller does.You have to negotiate with the seller and make a written offer to be taken to the bank for approval.Not going to be easy with a short sale situation and the bank is already upset with the seller and now preparing to foreclose soon.The tenants are going to be the hardest part in this mess because they have just restored their tenants rights with the accepted rent whether it was the entire amount or not.I doubt the bank will stop the auction unless you offer much more cash than you should and no contingencies sight unseen.Expect the inside to be trashed and need a full gut job remodel and make your offer accordingly.You'll have to formally evict the tenants after taking possession

So when I sell it I could pay them the rest, or keep the note in place and use the cash to invest in another property.  

I'd be very happy to pay a fair price for it and spend the money needed to restore the home to good, whole living condition again.  

Working on a condo restoration project in Houston, Tx.