Is it a lost cause and I'm just supposed to fold and cut my losses??

A promissory note and deed of trust are important but there are also other disclosures and documents you should collect to help protect the loan - Lender's Title Policy in 2nd position behind the bank loan, Loss Payee on the hazard insurance policy binder behind the mortgage lender so your parents get reassurance they'd be paid back if there were any claims that need to be made.

He is now "claiming" that he took a $70K loss but has not provided any documents. 

., other borrowers in your market, contacts for tried and proven contractors, etc).Of all things to do, you should not hide and ignore phone calls.And last but not least, if none of that works, list the property in hopes to recoup your losses and let another investor take over and get out of the project and take the lessons you learned and apply them to the next one.

I've had several wins that way; nice as it offsets those losses that are bound to happen with repair expenses!

It included similar "loss of rental income", same liability limits, included building code upgrade, vandalism and even 10% for water damage and 5K for rot.  

This creates two loan payments ($100,000 of equity and $300,000 on the new mortgage).Key NumbersHome Equity Loan Interest Rate: 6%Mortgage Interest Rate: 7%Rental Income: $3,000 per monthExpenses (management, taxes, insurance, maintenance): $800 per monthIncome and ExpensesMonthly Rental Income: $3,000Monthly Expenses: $800Monthly Mortgage Payment: $2,000ExplanationThe investor earns $3,000 in rent each month.They pay $2,000 on the investment property mortgage and $800 on other expenses.This leaves $200 profit each month or $2,400 per year.However, you have to pay $6,000 interest on the equity borrowed.This leaves you with an annual loss of $3,600.This example shows that while the rental property generates positive monthly income, the interest cost of borrowing the initial $100,000 results in an overall annual loss.

At one point she even said if the hotel doesn't provide kitchen then I need to pay her $500 just for food for 6 nights.If you were the landlord, what would you do? 

I hear there's a lot of potential to make some great deals as a buyer/investor on homes in Chicago because of the significant net population loss over the last 2 years. 

Because of these risks, second-position loans often come with higher interest rates and stricter terms to compensate for the increased likelihood of loss.