Mold and other possible issues from a wet/damp basement leaves you open for a lawsuit from tenant for negligence to make the necessary repairs, especially if township has sent you a letter of violation, you knew about it! 

You will open yourself up to a lawsuit from the tenant as well as further enhance tensions with you and the city

If you make sure that all of your assets are encumbered to the max, and a few other techniques, you can be sure that there is nothing there to levy on in the event of a lawsuit judgment.  

But, you do want to know if there are bankruptcies or law suits or divorce in process with the borrower.

In case of lawsuit you will have an affirmative defense3.

And there are plenty of stories, trotted out when lawmakers are considering issues like this, about "innocent" tenants who had legitimate disputes with unscrupulous landlords, but ended up tarred with the irreversible stain of an Unlawful Detainer lawsuit on their record.  

If at any time you're properties pave the way for a lawsuit don't bet the house they won't take advantage.  

The property was listed on the MLS as a 3 family + in law suite so my strategy was to buy the property, fix it up to increase the rents, and file for a special permit with the town to make the in law suite a legal 4th unit.

I want to do everything I can to ensure I'm not opening myself up to a lawsuit while not spending money unnecessarily!

However, to me it is screaming ADA non compliant lawsuit.