The property was cashflow positive, producing cash 25% in excess of monthly expenses, including taxes and insurance. 

I know $500 to $1000 in earnest money is usually okay when dealing with investors, but I think $5000 is excessive.  

Also, instead of a full lawsuit to force her to sell, can I simply place a lien on her house to simply recover for my costs with the appraisal & attorney feesThxIf the cost of removal of violations required to be removed by the Seller pursuant to the printed provisions of this Contract of Sale shall be in excess of five hundred ($500􀀉 00) doll􀀄􀀅s, the Seller is hereby granted the option to withdraw from this Contract of Sale, in which event the Seller shall refund to the Purchaser the monies paid on execution hereof, together with the net cost of exa􀀊ination of title and any survey actually incurred by the Purchaser, not exceeding rates usually charged by any major title company where no policy is issued and where title shall fail to close; whereupon this Contract of Sale shall become null and void without any further liability on either par􀀁y to the other unless the Purchaser shall agree to take title subject to said violations and assume the performance thereof and receive an abatement in reduction of the purchase price in the sum of five hundred ($500􀀂00) dollars􀀂 The options herein granted shall be exercised by notice in 􀀋riting by certified mail, return receipt requested􀀃

This practice opens the doors to abusive practices when the fee is set or obtained in excess of what the owner would be entitled to.This is why other professionals in RE, such as attorneys, title companies, closing agents, appraisers and Realtors have a bad taste for wholesalers in general. it's not just that they may be seen as facilitating transactions without a license, but doing so being woefully uneducated in real estate and setting fees in line with net listing practices in taking equity from owners. 

The excess funds stay with the county for 5 years before they turn over to the Department of Revenue.  

With it being nearly $183,000 difference between the list price and zestimate there is a reason that house is priced that way either an under lying factor such as zoning, un-permitted work, excessive localized crime, or could be a thousand of other variables.

More than 50% is excessive since you are doing all of the work and he is not funding the entire project.  

I haven't done the math but it seems that in the 100% financed situation it would be better to go for the 30 year loan and use the excess cash flow to pay down the heloc faster.  

CIV §1950.5.(4)(c) A landlord may not demand or receive security, however denominated, in an amount or value in excess of an amount equal to two months’ rent, in the case of unfurnished residential property, and an amount equal to three months’ rent, in the case of furnished residential property, in addition to any rent for the first month paid on or before initial occupancy.

. - Excessive cost: Advertising 10% upfront and then charging for everything under the sun is deceptive at best, and dishonest at worst.