My company loaned funds to a buyer and now the buyer would like to give back the property due to special circumstances.

You can only get 1 FHA loan, unless you have some exceptional circumstance such as having to move out of the area for work.What seems more important to me than low $ down is buying for a great price.

And they started out great, but life circumstances got in the way.

Since you've already made the decision to invest out of state, you now have the opportunity to do so in any market you choose and aren't constrained by personal factors or circumstances. 

I'm already pretty clear on the fact I made a poor decision, so now I'm trying to have a thought-out strategy going forward considering the circumstance. 

There are two exceptions: Nonqualified use does not include any period of such use that occurs :(1) any time during the five-year period ending on the date of sale that occurs after the last day of use as a principal residence, or [ Meaning, of last  5 years, if you  rented a property of last 3 years does not trigger non qualified use, but in the last 5 years, if you first rent for 3 years and then move in for two years as a primary residence, 2/ 5 years is non qualified.](2) any time (up to two years) that the taxpayer is temporarily absent due to change in place of employment, health, or unforeseen circumstances. 

I would say as a take away for anyone debating working on without a permit or purchasing a property with un-permitted work, this circumstance is not ordinary.  

HM lending is a wonderful tool to be used under the right circumstances 

Residential property is more about control due to circumstances, personal preferences, cash flow, equity build up and debt pay down...holding for term and exiting with cash...Why are you investing and what do you hope to accomplish with this project? 

Regardless of circumstances it just couldn’t be avoided, I had to address it.