The first block is fine, it does need a good ironing. The modified block, if you choose to go this route I would recommend to use head and. Bond on your appliqué piece it will give you a cleaner edge to work with the stitch on. Or cut a larger appliqué piece so you can iron over the edges then do a blind hem stitch.
All being said, iron the hebi gebies out of your first block before you give up.