They are threatening to sue to try and get something from you but most likely will not go through with it as you have no written contract in place and in california there is also no non-compete agreements.

If you haven't got keys, evict for non-payment as its the easiest Eviction.

That means either you won't cash flow or your Return on Equity (ROE) will be terrible.Since this is your primary residence you'll be exempted from paying capital gains taxes when you sell.If you sell to your parents, it will be considered a non-arms length transaction and will get closer scrutiny.

When converting common living areas into additional bedrooms, many DSCR lenders might view the property as non-conforming, which could pose challenges.

Note investing can be divided into performing vs non performing.  

And even within REITs, while most people think publicly traded, you can also get into Private REITs, non-traded REITs, etc.  

If using a lender this is a non issue.

Is it overkill for a potential non-problem?

The only loans I see non recourse nowadays are those lending to a SDIRA which they have to be non recourse or an unsophisticated private lender.

He could try to evict you for non-payment of rent.