I resolved the issue with .htpasswd
The file was in the wrong place. I actually turned on the visibility of hidden files and manually moved the .htpasswd file to the correct spot.
Went into OmniFocus sneakypeak and set the location to
http://computername.loca/dav clicked sync now and it worked. Tried to then use the Share Settings option to push the options to the iPhone and it said it couldn't find the host. Tried sending the settings via email. Click on the link form the phone and it said it couldn't find host.
Changed the sync settings in OmniFocus to be my local ip instead of computername.local and sent the settings again. This time, it didn't say it couldn't find host, said it timed out.
So - I think I've got the local WebDav set up right on the mac. Now I seem to be having a timed out problem - which I suspect is a different issue.