I think you should sell the house and take the minimal loss now before it gets any worse.

77.5K for a property that rents for 1200 with what sounds like minimal repair work is a sweet deal!

As we know, a real deal never makes it to some public "list", and most of them were at ARV with a LOT of exaggeration about ARV and minimal rehab costs.

And if so, how should I proceed to minimize the bad feeling of the first lender?

The first is a hard inquiry when the lender or mortgage broker etc. pulls your credit.The drop in points is very minimal and for a short duration.

I suppose over the years I can try to minimize the risk of the entire portfolio and use some of the profit to pay down debt on some properties for a better overall picture too?

I have loans at 5-7% for 30 year fixed so te thought is to sell enough property to pay down all the debt and then sit on the minimal amount of properties with no debt with cash flow that will provide for all living expenses.

It could have been a bank in second position like you said, but the way it worked seemed strange...When the lender's maximum bid was the judgment amount the bank's agent would say something along the lines of "the plaintiff bids $100, up to $x" (loan balance) so the investors would know how high the bank would go and if no one was willing to bid over that amount the bank bought it for only $100 to minimize the doc stamps.But when they were willing to bid over the balance the agent would say "the plaintiff bids $100, up to an undisclosed amount in excess of the judgement."

I'm interested in minimizing time and expense in the event of buyer non-performance.

You can also rent space at the library or the Goodwill Centers, their fees are minimal and sometimes free.