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You have to remediate it and disclose it from that point forward.  

Best options are to get an asbestos remediator (read: expensive) or to cover the floor as is. 

Remember that FHA mortgages have very stringent requirements for condition of the property, and its possible the current owner has gone through the inspection process and found that the property is lacking in certain areas, perhaps in items that the owner is unwilling to remedy prior to sale.Last note: you wrote that the owner specified it would NOT be able to be an owner-occupied purchase... was the property fully rented with leases in place?

Have you had a mold remediation specialist take a look at this? 

Then, right before closing, the seller backed out of the deal, and you suspect this listing agent came along and talked him out of it.Not giving legal advice, but there are legal remedies if the seller backs out.

@Laura Pruitt Hi Laura, Full Disclosure, I am a General Manager for a Mold Inspection, Removal and Remediation Company in St Louis, Mo.

You can expect to pay thousands each month to the city in violations, plus the additional time/expense of remedying each one and getting it inspected (see above).AEP: NYC rolled out a program implemented by HPD targeting the 200 worst buildings in the city, based on violations.

1) FLIP or REHAB AND RENT OUT: Currently in for 215k, need 20k mold remediation then about 85K-100K rehab, might be able to sell for $350-390K.

Here is a web site you can go to that has advice on foreclosures legal remedies.