Whether it's considered an arm's length transaction is debatable, but it's not illegal.Move forward with the sale and ensure full transparency with all involved parties, including your CPA.

Things they did bad which I wish I had asked more information about:Never involved in the screening of tenantsThey recommended keys for cash by waiving the rent amount buy only collecting fees which they would get not meThe cost to evict is 750-950 yet other companies told me they will include eviction in the priceThe tenant didnt pay in full last month and I was the one calling out to them and asking questions then a few days later I get an email saying something happened with the tenant and they are investigating.You get passed from person to person every week or so.No one told me when the construction was complete and so the house was ready for a week and the post to zillow and other sites was not done.It took them another week to take pictures and then another week to upload it.I was paying 200 dollar a month electric bills while the house was vacant because they left the AC running in the empty property.

I am reaching out for your expertise regarding a situation involving a seller from who I purchased a property subto an FHA loan in March of last year.

Because buying a house in excellent condition and then totally changing the layout can be expensive, especially if it's involving load supporting walls. 

Are you able to get a partner involved? 

@Geoff Engel If you don't want to be a landlord but still want to be involved with investing you could be a private money lender for flips or in partnerships and bring the money to the deal.

Of course, every owner's situation is unique and factors like the legal entity involved, purchase date, adequate passive income that can be offset with the cost segregation study, etc., will need to be considered.

“How” they live together is more involved.

For example, you might agree to a 70/30 or 60/40 split, depending on his level of involvement.

His "owner occupied" loan application is ok if he intended to live there when he applied.