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Every low-level character I've played has had a list of stuff. In fact, I once made a "survival package" list of equipment that I use as a base for new, 1st level characters (just cross off whatever's unappropriate). At higher levels we just assumes that everyone has all of the little things.

Depends on how creepy you want it to be. You could always have the faery dragon "trapped" upstairs by something evil that was accidentally brought into the house by its former, rather unfortunate occupants.

My first thought was a fire (forest fire maybe?), but the waterfall makes perfect sense after the fact. I think a group would be fine with this.