You do not want to go cheap on this, especially when it's for life safety. 

My concern is whether the city could deny permits for these modifications, such as removing walls or converting a garage, or if they are mainly just concerned with safety and habitability.

@David Randolph - my use of the word "threatened" is in regards to the statements made by, as at the time I understood it to be, the real estate agent negotiating the sale to inform me that I could be sued and a lien placed because I was refusing to sell, which would mean that either I agree to sell and put my children on the street or I refuse and they will sue to take possession and I would still put my children on the street, I took that as a threat to the well being and safety of my children, legally it may not be a threat, ethically and morally, it is to me.

This is a great place to invest for safety and appreciation.

I typically build in an inspection contingency into my offers (yes this reduces my competitiveness of my offers, but its also a safety net to protect my bottom line).

The brick construction is a plus for durability, but check for any signs of foundation issues, especially if the property has settled over the years.Be sure to budget for updates to key systems—plumbing and electrical upgrades can be pricey but crucial for tenant safety and modern functionality.

But the facility is obsolete so that no self pay patient or insured patient would live there.  

**Proactive Steps**: - **Prepare for Inspection**: Ensure the property is in excellent condition, with all necessary safety items in place (e.g., smoke detectors, proper handrails).

For example FHA guidelines say you can deny an ESA if they cause an undue financial burden, cause a direct threat to the health and safety of others (the letter from the neighbor supports this), or cause substantial physical damage to the property.

Sometimes it might be better to leave some money in the deal to get a better cash flow and provide a little more of a safety net.I hope that helps.