Unless He has a proven background in Sales, very few lenders will touch him until he has an established track record.What I would suggest, is ask the relative if they would do an Owner Finance for 3-5 year Balloon Payment, if you are trying to make this happen in the short term.

House recently went from exclusive bidding period to extended, and I'm quite positive it will sit there untouched, until at least one price reduction (and probably past that).

Typically in my (limited compared to yours) experience most issues come up shortly after moving in.

The key difference here is the buyer wants a property he can live in and enjoy for a period of time before converting to a rental.

The IRS considers debt reduction (when not replaced with additional equity in a new prop) to be the same as cash in terms of its benefit to you, so you would be taxed on the $125k you didn't roll over.If you don't want to carry a mortgage on a new property, you could sell, use $125k to pay off your current loan, and then put in an additional $125k of your own cash to make up the difference, resulting in $325k of equity in the new property/properties, and meeting both the equity and total value rules.So the short answer is YES, it is allowed for you to go from a $325k property to a $200k property while paying off your $125k loan, BUT you will pay taxes on the amount you don't roll into the new property ($125k).

In particular, it seems like working with a private lender / hard money lender with a short term loan for the course of the flip might do the trick. 

(this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance) What is my minimum down payment required?

I do believe in 30 year loans as opposed to 15 year loans on short term rentals because I'd prefer to cashflow first then refi or sell within a year or two.For everyone else: What was your LTV and interest rates for your first investment property and how many banks/lenders did you talk to before finding one that best suits your situation?

One thing to keep in mind is property management for short term rentals. 

As a landlord, I'm more put off by your short term lease than the dogs (we allow them, excluding bully breeds).