The PHA shall not make any housing assistance pay-ments if the contract unit does not meet the HQS, unlessthe owner corrects the defect within the period specifiedby the PHA and the PHA verifies the correction.

Don't rent undermined units.in LA...between sophisticated tenants and tenant advocacy groups it wont end well...you could possibly live in the undermined unit to mitigate risk..always ask for the LA city inspection to see when the last time the city inspected and if they were concerned with the unpermited unit or other defects.

Title defect like an unexpected lien or the bank never recorded the foreclosure deed and now they can't find the deed to transfer title into their name.

It really depends on the market, in California short sales and REOs are usually listed slightly below market and will sell for at or even above list price most of the time unless they have major defects. 

I don't agree with photo-shopping defects away and surprising me when I get there. ie Holes in walls, water tower in the back yard.

It will show up every single defect in the wall and it is a bear to touch up later.

Does the sales agreement allow for the buyer to cancel the whole action before the escrow process if due diligence turns up an incurable defect? 

Perform tenant back ground check, all of his court cases would show up and he would never make it thru my tenant screening process.Ok lets say somehow he did qualify.Do a pre occupancy, or move in, inspection with the tenant, where all defects in the property are thoroughly noted, and pictures are taken ( I do this).

He totally wants me to remove the portion about the property being "free from hazardous substances, and from violation of zoning, environmental, building, health or other govt codes or ordinances and that there is no material or other known defects or facts regarding the property that would adversely affect the value of the property."3. 

Roof needs to be replaced and about 2-5k of other defects.