If the Buyer records his/her contract against the property, and later either defaults and/or decides not to pursue the option, then you still have the cloud on title until the Buyer provides you with a release or you file a lawsuit to clear up title. 

The option that we both agree would be best for us would be to use the VA loan to buy a home that has a finished basement, detached guest house, or in law suite that would include a separate entrance, a bedroom, bathroom, and kitchen etc. so that we could rent out that space and essentially have them help us pay off our mortgage and build equity.

What are you looking for precisely, lawsuit protection?

So if it were me I would terminate the PM and let them try to file a law suit.

If you understand real estate as an asset class and can get better results for the IRA by having the IRA invest in real estate, then such an plan is superior to having 100% of your retirement savings in market-based assets.An IRA (self-directed or otherwise) is reasonably well protected from lawsuits that stem from you. 

You are not named as the plaintiff on the lawsuit.

Reason is you could get involved in lawsuits based on something that the prior owner did, and the tenant decided to sue the LLC after your takeover.

We took out a 3.5% down FHA loan with a 3.75% interest rate.Aside from the potential in the neighborhood we were attracted to this particular house because of its attached in-law suite that would make a perfect short term rental.After moving in the beginning of October we got started sprucing up the in-law. 

What is the best way to protect ourselves from potential lawsuits, etc?

I'm essentially doing this now and have an in-law suite that I AirBnB for greater than a normal rent in my neighborhood.You should analyze the property and see what your PITI would be with 3.5% down and what you can realistically get for rent in the other unit(s).