It would seem obvious that the 2nd would eagerly pay off the foreclosing first, but I'm unclear on the mechanism to do this (aside from just sending the mortgage company a check), and wondering how they eventually get reimbursed?

Are you permitting the rest of the three unit conversion, because if so then it seems this would have come up as part of the mechanical plan check? 

This website offers a free 1040 Excel that might help you better understand the mechanics of what is being allowed/disallowed, etc.Federal Income Tax Spreadsheet Form 1040 (Excel Spreadsheet) Income Tax Calculator (google.com)

Other than zip code your other factors that will play a large part in the rates are your credit score, your claims history and the properties claims history, Age of home and age of mechanicals, number of units, square footage, properties intended use(short term vs long term rental). 

I found many of the units to be in need of upgrades both mechanical and finishes.

I am selling a house to a buyer who will pay in cash,  the buyer's agent is using Colorado Title and Closing to manage the documents and they sent me a document showing the title insurance company they have "selected" for me and the total cost for the title insurance is ~$1,900 and it includes things like owners extended coverage ($50) mechanics lien ($50) and copying fee ($50) .

Structural, electrical, plumbing, mechanicals, flooring, paint, trim, kitchens, bathrooms.

The amount of deferred maintenance, age of home, age of mechanicals/major components plays a big role in your controllable variables. 

Maybe a garage that looks like it will make a nerd into a master mechanic. 

Make sure most of the mechanicals/ big ticket items are new or less than 5 years old.