Not if they have a legitimate need for an ESA. 

To be eligible for it you must be self-employed or have legitimate business with earned income. 

Other random expenses could be included like a portion of your phone, wifi, travel, or other LEGITIMATE expenses related to running your real estate as a whole (and not to specific properties). 

If I were to acquire the property, what would I have do to make this a legitimate (and safe) dwelling without putting myself at risk?

Assume an accredited investor and no securities law issues for simplicity.1) Homeowner pays for a legitimate appraisal.2) Homeowner grants the right to Investor to receive 10% of any appreciation above the appraised value when and if the house is sold.3) In exchange, Investor pays the homeowner an amount equal to 10% of the appraised value, with 20% down and the rest on an interest-only promissory note held by Homeowner.4) The note bears interest at Prime + 0% and does not have any origination fees or prepayment penalties.5) The investor gets credit for 10% of the eventual net proceeds from sale with the net being 10% of net sales proceeds less the remaining balance of the loan.6) If the investor defaults on the loan and fails to cure the default, the claim on the equity is forfeited.7) The homeowner remains fully responsible for costs of maintenance, insurance and taxes, but this is offset somewhat by the interest on the loan and the cash received upfront.8) Presumably if there is a gain beyond the homeowner's basis, there is no tax for now unless the proceeds exceed $250k for an individual or $500k for a couple.

At first I thought maybe the back was a converted garage but that is not the case - it is a legitimate 2nd house. 

The home owner may have filed the BK for legitimate reasons, but as far as including the home that is currently going through a foreclosure in a trustee state is concerned, the CH 7 BK will not prevent the sale.

They can be legitimate, but they are not the preferred way to go.

To be eligible you must have legitimate self-employment activity (regardless if you have a job or not).

I'm not in a position to judge whether that is a legitimate concern or an overreaction.