My problem is that my hard money lender just pulled out on me for the reasoning that I purchased the house for too cheap and the underwriters don't like it.

I would think that everyone needs a credit and background check but I also want to be reasonable and not have them walk away.

If your rent is a hundred dollars higher than average, in most markets, that is with in what is tolerable if you have a reason for it.

Reason 3 is especially bad for owners.

Likely the reason why you got this off of a tax deed is that the prior owners determined they couldn't do anything with the land either and quit paying the taxes rather than throwing good money after bad.

For several reasons. 

Address each comp the bank used and explain why it's not a good comp, and then provide your own with your reasoning as to why they're better.

Any reasonably qualified 1031 company or CPA should be able to walk you though this.  

In my experience, there is always a catch on deals like this  - not that the deal isn't good, but there's likely a reason you're getting this great of a deal.  

However, this is not always the case due to a variety of reasons.