What prevents the end buyer from just forfeiting on a contract right at the last minute, then your contract with the seller is voided and then your buyer just buys directly from the seller?

Since I am so nice I would extend but let them know that the emd is forfeited either way.

I give applicants a 4 hour window after notifying them they have been accepted to respond and either get me the deposit or make arrangements to get it to me before the end of that day before I will give the house to someone else.I also require they sign an agreement that their deposit is a holding deposit until the lease is signed, and they forfeit 3.33% of the deposit per day the house is held if they do not sign the lease and take residency.

Unfortunately, you did not have the tenant sign a "deposit to hold" contract or a full rental contract which would have written terms of how the deposit would be handled such as citing that it would be forfeited if move-in or lease signing did not occur before X date.

At that point in time, if I do not cancel, I will be forfeiting my EMD.

HUD STILL owns them, so what I was wondering is if they failed to find a buyer and forfeited EMD on these properties (which would add up to a ton by now) or are they advertising the properties before they are even auctioned ( which doesnt make much sense unless they know they are going to be auctioned and have an interested party before hand...)

We will also have a personal guarantee written up by an attourney stating that we will forfeit everything we own if the loan is not paid back.

They would probably owe you rent until you re-rent it (good luck getting anything beyond your security deposit) and would forfeit their option money.All the specifics would need to be in the lease and in the option documents.Really, its no different than if you purchased a house, got a mortgage and then rented out.

Or does an option allow you to keep their downpayment if they should forfeit in one way or another?

You can post a 3-days notice to pay rent or forfeit the lease agreement after the grace period.