However, if you go this route, I will advise you that most states award deficiency judgments (the amount owed on the note less the profit made at the foreclosure sale).

I just got the general contractor to write up a report with all the deficiencies with the house.

That may or may not be true Darson, I’ve seen lists of deficiencies from neighborhood inspections that have easily 15 to 20 things on them. 

The project is a gutted shell so easy to pick out the deficiencies.

Yes, you can terminate the lease at maturity with proper notice.I'd never specify what a cost would be for damage as that can't be determined until the damage occurs, if you want to say $25 for cleaning something, clean is in the eye of the beholder, I usually do that in a walk through at termination giving them time to correct any deficiency. :)

The current owner privately bought the house and is now trying to sell it after discovering all the deficiencies.  

@Mike Wood thanks, after getting the itemized write up to match the inspection there were quite a few deficiency that he hadn't listed or accounted for. $70K will turn to 100+ quickly.

The statement shall be given to the tenant, if the tenant is present for the inspection, or shall be left inside the premises.(3) The tenant shall have the opportunity during the period following the initial inspection until termination of the tenancy to remedy identified deficiencies, in a manner consistent with the rights and obligations of the parties under the rental agreement, in order to avoid deductions from the security.(4) Nothing in this subdivision shall prevent a landlord from using the security for deductions itemized in the statement provided for in paragraph (2) that were not cured by the tenant so long as the deductions are for damages authorized by this section.(5) Nothing in this subdivision shall prevent a landlord from using the security for any purpose specified in paragraphs (1) to (4), inclusive, of subdivision (b) that occurs between completion of the initial inspection and termination of the tenancy or was not identified during the initial inspection due to the presence of a tenant’s possessions.Emphasis is mine.

I'm not sure the tenant cares if there are belongings, but they have a hard time overlooking any deficiencies that you will cure after move out.We have had people pay the full month and move out mid-month (early) in hopes of getting a prorated refund (we work hard to do this, sometimes, split the empty days cost with them if they have worked with us) and people who have no money for any of the month but we incent them to get get out as soon as we can (keys for cash).  

Obviously it is appropriate to re-grade if a hidden foundation, mold, major appliance, etc deficiency is uncovered during the inspection period.I am fully aware of the TX option period as I have done many, many deals in TX.