If you've decided to sell the house, my recommendation would be to do an analysis of how much it would sell for given various different rehab scenarios:- No rehab- Light rehab- Medium rehab- Full rehabYou can define those terms above any way that makes sense for your house (and you can have many more point for analysis as well).Once you have the likely selling values for each of those scenarios, compare the cost with the potential profit (and the work involved) and take the approach that maximizes your return.

It turns out, the house is in one of the best locations in town and is in incredible condition (has never been rented to a person outside of his family). 

As a residence, that won't appraise out, (1.) there is too much value in the greenhouse attached than to the residence (2.) won't be getting a market approach on a 1 bedroom or with the greenhouse (3.) it's not common for the area (4.) the highest and best use probably isn't residential (5.) marketing time on an appraisal can't be established......there is just a list of appraisal aspects with non-conforming properties. 

Let them know you approach property management different than the previous owner and will be following the terms of the rental agreement, including serving legal notices when necessary.

Please help BP on the best way for me to approach the uncle.

The FHA approach is sounding very good.I am eager to read through the comments, too. 

After reviewing the comments and talking to a few folks, it seem better to approach a  Home Inspector and have this person assume the liability. 

If your plan is to approach sellers directly with the intent of getting great deals and flipping them, then your buddy is probably correct.

I have not contacted the homeowner yet and wanted to have a good understanding of how to approach a pre-forclosure, as I have not done one of these deals. 

"I Buy Houses": I like this approach because it's direct.