They will probably re-list with a lower reserve or send out for more standard MLS driven REO listing.

If your tenant's income level is high, this could maybe be worth it, but doubtfully so.

There have been a few times that I have suggested to a guest to just book another night at lower rate if they request this prior to booking.  

Laying out an effective tax strategy involves a lot of work at this level, so just be prepared for this to not be quick and easy.I'd start by first having a meeting with your current adviser and ask them to explain their current advice.  

I plan to gradually fix up the units and then raise the rent progressively until we reach market level which is around $425 for 2bd/1bth a month and $500 for 3bd/1bth.

@Ashley BenningThere will be two or three levels of MLS properties that say "cash only." 

Then they add on all kinds of "extras" that bring the price up to normal levels. 

I am having a little harder time finding the lower end properties I usually invest in but that is mostly because I have been tightening up my personal requirements and ratios.

There are tons of responses for what to do when the appraisal comes back with a LOWER square footage figure vs. the advertised MLS listing, but what about the opposite case?

Having several small to mid-sized banks located in the geographical area of your properties is usually what most investors have at that level.