If you get the right local recruits around you in a #2 situation, it's a monstrous advantage. I coach a PR team in a world because I saw the success some were having, and I promptly had three straight awful crops of PR talent, so my team still sucks...but, if the right guys show up, you have a giant advantage for sure. ANd, as evidenced by some of the PR teams out there, you can create teams that are virtually unstoppable.
The #1 situation is tough to hit the peaks that #2 situations CAN hit. And, in D3 for instance, I think #1 is just a bad situation to get into. My most successful team ever was Montclair St. in Tark where I won 3 Championships. But, with the new game, I didn't feel like it was possible for me to compete there. First, the recruiting budget was just too small at D3 to really recruit the states around, when you have PA and NY so close, along with all the other Northeastern states it's just so tough to get any real coverage scouting. Then, you have dozens of D2 and D1 teams within a couple hundred miles jumping on your recruits late, and the D3 budget makes it impossible to fend them off. At D2 it's a little better, and at D1 it might be fine, I don't have enough experience there to say. But, at D2 and D3 you definitely have an advantage in the right location.
Colorado and PBAU at D3 shouldn't even count as a #2 situation though. Those two schools are basically free passes to the top 25 every season unless you just completely screw up. I have Colorado in Knight and haven't won a title in 30 seasons. Honestly, it feels like that proves I'm not very good at this game, because any decent coach should have at least one title if they've got 30 seasons at either of these schools. I don't usually get absolute superstars at Colorado...but I don't think I've ever had just a flat out bad class there.