Still mixing a lot of fact and fiction. Exact match domains still work. People have been saying that Google is 'going after' them, but that's not really true. There are plenty of exact match domains out there that are legitimate and separating the good guys from the bad guys is not going to happen at the domain level, doesn't make sense. Also, please keep in mind what the duplicate penalty content is for and how it's used. Having you site drop after an algo shift is not uncommon. I know plenty of domain farmers (in the 2 million+ domain range) and the biggest issues they face is bad rankings because of lack of content, overly aggressive link building, link wheels, etc).
I believe that a warning in GWT means it's been flagged for a manual review, but might be totally wrong about that. In the 15 years that I have been doing this, I have never been warned or received an email about unnatural link building.
I am currently chasing a link spammer/domain squatter right now so I can attest that those methods still work just fine if you know what you're doing. Once your site makes it in front of a human, its simple to figure out what other sites you have and what you are up to. Setting up single sites with different WHOIS info, different CBlocks, unique links, unique content, is extremely time consuming.
I have found that I make a lot more money focusing on a handful of sites and making them as best as possible, than I do managing 100s of sites with spun content, crappy links etc.
Start thinking out side the box to get real visitors coming to the site and interacting, social signals are a huge part of search. Look at microformats and push reviews, give people a reason to interact and refer other people. City directories and sites like that still have a place in the search engines.
If these sites really make money, I would go after local search because of the city name. I guess it depends on what you think a lot of money is. If all else fails, find a local biz that sells or caters to your KW and try to sell them the domain, especially if its already getting traffic.