Of course the seller knows the risks and obviously should consult someone else prior to accepting an offer. 

New York has already made checking someone's background for prior evictions illegal.

For instance, let's say you do the rehab and go to rent it...considering the relatively low value of the property, it's reasonable to expect that the tenants will have low or no credit, they may be unemployed or on income assistance, they may have minimal employment options, and/or they may have a very spotty history with prior rentals.

It is good that you are checking the areas prior to purchase. 

Section 121 exclusion you are referring to asks: Did the taxpayer live in the home for 24 months of the prior 5 years?

I'd start with cash for keys but if that didn't work,  seems like it may take 3-4 months to evict a person,    my big question is getting liability insurance on the property.I get that there isn't much I can do preventing the previous owner from trashing the place  (she is 60+ so I doubt she's taking a hammer to the place)   but I do worry that if she or someone else were to get hurt prior to an eviction and sues me.Can you get insurance on a property under these conditions?

True that mate.Donated a few houses years ago (Maybe you saw it on TLC's This Is Life Live) and was called a racist heheI'm caucasian and the family was African American so explain that one to me heheheFunny thing is mate, it's not a "consulting fee" per se.Fully refundable which is clearly stated in the agreement and in our FAQ prior."

With 90 days notice, I've begun working on my punch list of updates to the unit prior to the turnover. 

The prior owner that my friend bought the house from had been using city water and sewer (and paying water/sewer bills) for 25 years.

Certain lenders could impose limitations or demand that you settle the current mortgage prior to executing this kind of transfer.Make sure your property is adequately covered by insurance.