I don't know if the GC made a profit or took a small loss but we got that out of the way in the beginning by having the other GCs bid the same job. 

Assuming you want a secondary market loan for your primary:If you have had the rental long enough to claim the income on your tax return, you can most likely use that income to help qualify (or loss, if that is the case)I would strongly consider a secondary market loan for a cash out refi of your rental.

The $500,000 in construction costs would not be able to be recovered. 

It will ultimately be left to the courts's discretion but if you have a strong clause in the instruments you have a chance to be able to pursue those losses which incur by way of enforcing the instrument.  

If the property loss is less than the difference you are currently be paying in rent vs the "rent" on your house hack, then buying the property would be cashflow positive for you and your SO in your current situation.

From a lender's perspective, these owners want the lender to take a loss while the owners move to another home ... and make payments on the other home (lot and construction costs).  

Many folks believe that because Chicago is much more diverse in its industries, economy and has better job creation strengths, that Chicago will be immune from Detroit's death spiral of (a) borrowing and pension debt, (b) failure to control the costs of government, (c) loss of state revenues, (d) bad public schools and (e) ever increasing tax burden for working, middle class families.My interest in this question stems primarily from the dramatic price declines in Detroit real estate prices before its municipal bankruptcy. 

I would really like to pick up these units, but I'm at a loss on a strategy.  

I agree with what you're saying in most cases, especially standard flips, etc.In this case there's some additional considerations because it's personal...I'm also trying to figure out visibly respectful ways to handle this, because I'm looking to use these methods for future probate deals, and I want to have tools in my belt that I can use to demonstrate respect for the relatives and their loss. 

The country has not fully recovered from the 2008 recession; and to add a 17% reduction in buyers on top of a recession will not speed a full recovery.