Then comes collections.

Assuming you do not get whacko judge, the unpermitted unit has no impact on collecting rent or the eviction process.  

This is an exception under all insurance policies so the next question is even if successful with a claim how confident are you to ever collect from this seller without insurance cooperation? 

They have a mental list of hard to collect rent addresses and they may help connect you and the owner. 

Also in terms of collecting rent, would I need a lease agreement, and account for this during tax season.

I had 98% rent collections through moratorium

Im paying X on the HELOC, but collecting XPLUS on the note. 

I us a property management app to receive less phone calls from tenants and collect less rent in person.I am trialing a couple others, I will be glad to let you know what I decide to go with if I find one better. 

Some will be more active, and some will be passive, but at this point, I would push forward with directly connecting with investors who have nothing to sell and are not collecting referral fees.  

You have come out with a narrative that is the exact opposite of the collective experiences of 1,000's of investors and PM's who've collectively dealt with 10's of 1,000's of Section 8 tenants and are refusing to provide any insight into your experiences.