They've been there for 2 years and feel it's their "home".Did they decide not to exercise their option or are they simply unable? 

Most banks will exercise what is known as the Due on Sale Clause for this type of transfer, essentially stating you have 30 days to pay off the note in full or transfer the property back into your personal name.

Exercise patience and build a relationship of trust with these potential sellers.

When I went through this exercise a few years ago with a proposed multi-family build, our challenges were not finding a model and a builder/vendor, but meeting all the requirements needed for site selection. 

As an exercise, it's fine to play around with the numbers to get the desired cash on cash return, but you should know when you've deviated too far from the median price.I suggest looking at the sold listings on Zillow, Redfin, etc. to familiarize yourself with recent comps in the neighborhood.

To your excellent points in your posts, I think that the fact of the matter is that almost nobody has actually gone through the exercise of actually thinking about what THEY WANT out of life in general, and then forming a plan of action around those desires to get there! 

Also, once it’s exercised are there large fees and does the tax lien payoff increase dramatically?

This is a hypothetical situation, but just curious if you were purchasing with a lease option and before exercising that option the seller dies. 

You still get all of the tax benefits and you don't pay capital gains until they exercise the option.

All the exercises are the same and there is no secret in getting fit.