I know a lot of wholesalers will record of a memorandum of agreement when they have a property under contract to protect themselves. 

I was thought to use a letter of intent letter to obtain the house.Is this all you have to do and that bypasses the purchase agreement or do you need both?

@Jason Leigh - Write them a letter explaining their shortcomings, as recommended above, but point out specifics in their management agreement that they did not comply with. 

For the most part I am not against your agreement, I think it's a great avenue.

I've already referred them back to their lease agreement.

All security deposits shall be held by the landlord for the tenant, who is a party to the rental agreement, in a bank, credit union, or depository institution which is insured by an agency of the federal government.

It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC.

But if you decide you are going to permit it, you need to have a contract drafted that protects you in case he is negligent or doesn't comply with the terms of the agreement.

Almost all reputable property management firms have strong indemnification and hold harmless clauses as part of their management agreement.

Or you can create a separate operating agreement to govern both.