Also, you would probably want to sell that "triplex" at some point down the road…and your exit strategy would be compromised by the unpermited work on this building.  

He should have brought it to your attention as soon as he tore up the carpet and found the issue, BEFORE installation and then work on a compromise/price together.

Just don't ever, ever compromise on this criteria.

Sadly, as a group, we've probably earned our reputation, which is why each of us needs to go out of our way to represent the industry with the highest degree of integrity and to encourage others to do the same.If the entire industry were compromised of the type of people we have here on BP, I think we'd be much better off

We have an unlisted number that the public records system has compromised.

FHA loan 400k monthly $2467 taxes PMI insurance all included.Rental market for single family home is $2200-2400One room rent is $700This would be a buy and hold compromise between being a pure investment property  and having an overpriced primary residence.Does that seem like an OK investment?

Do not compromise on the quality of tenant you will accept. 

I know it does not solve the whole problem (you would still own it) but maybe it is a compromise you could live with.

Do i just hold tight to the lease and risk losing good tenants or is there a compromise somewhere?

While he should allow showings with proper notice, unless it is in his lease that he must vacate whenever they tell him to, which I doubt, he can ask for and expect some compromise.