You would probably be far better off buying something with a mother in law suite or buying a 5 bedroom near UCR and renting it to students by the room.

Or should we operate as sole proprietors and use liability insurance to protect against lawsuits and have access to conventual loan sources? 

This is the preferred method to insure minimum disputes after move out and law suites over thousands of dollars in tenant damage.

Drag you through a long expensive lawsuit when he simply refuses to close.  

Your lawsuit should go to the Management Company (if there is one) and the Board (The legal entity).

According to him: Legally:  if the LLC gets sued Maryland laws would apply because that's where the lawsuit would be  whether the LLC was formed in MD or CA. 

Its generally a bad idea to buy a property if your spouse is representing the other side, thats a recipe for a lawsuit.

The purpose of an LLC here is more for protecting this asset from lawsuits.

My attorney told me they have a lawsuit and I took that as play ball. 

In judgments that require the repayment of a debt, the court may place a lien against the debtor's real property as collateral for the judgment's creditor.judicial foreclosureA type of foreclosure proceeding used in some states that is handled as a civil lawsuit and conducted entirely under the auspices of a court.