This is a lesson learned for me - I know to look for "missing" rooms for this now but I do feel that there was responsibility on your part as well.

Either way it would be a grey area, selling a house with a different amount of units/bedroom/bathroom seems extreme though. its an auction site, I have seen auction sites miss the fact there was additional lots in a sale.

Tampa’s market has been hot, but if appreciation slows or reverses, you could miss the window to maximize your gains.Exploring a 1031 exchangeA 1031 exchange could allow you to sell the property, defer capital gains taxes, and reinvest into a property with stronger cash flow.

Also look back on their application and see if you missed any 'red flags" so this can be a valuable learning experience for you.

I'd prefer 30 year fixed rate debt at 7% over this arrangement unless there is something that I am missing.

Not sure how I missed this!!

Now purchasing a home with cash is always good b/c obviously cash is king but also I think the part you might've missed is that, the money your utilizing on these home's won't actually be yours, but the banks or whatever institution you used to fix the home or make its value worth more.

I missed out on Colorado Springs and probably Reno.

I did what I felt was good amount of due diligence, but in hindsight I missed some deeper layers of analysis. 

I would not give them their deposit back because they missed a month, which turned into two, which turned into an eviction, which turned into them moving in their family and so on.