Build new laundry in closet or garage. 

But, that argument is not a slam dunk.If you will have to wait, you might want to put a mobile home on the property, or one of the portable "tiny houses" and use it for three years, and then file your quiet title suit.

Assume there is an unused space/large closet/whatever that can be converted into a bedroom.

This BR already have a large walking closet and bathroom.

It will have a small closet I their to make it an official bedroom.

I actually just did a renovation on one of our properties and split the master closet into 2 separate closets. 

There is not room for a drain pan in the closet where heater is located due to space restrictions.

The dimensions are 6'x11' with a small window and closet that takes up 3x3' of that space.

We added a couple of cheap 3 drawer units in each closet.

Install closet doors as necessary (accordion, sliding, swinging as appropriate).- Ensure electrical panel, wiring, plumbing, drains, heat pumps, central air conditioner, hot water heater, etc. are in good serviceable condition.- Trim baseboards with 6" trim, windows, throughout.Living Room:- Is that an attic access panel?