They finished rehab work and 2 yrs later exercised their option at 85k - 10k option fee= sold for 75k.

I echo two things Ryan has said: This business is reallybuilt on reputation -- so take the time it takes to buildit carefully, and secondly, exercise real caution.Caution doesn't mean not ever doing a deal.

I need to decide on the monthly lease payments and the price of the home when he exercises the option in 24 months.

For short sales, you'll get plenty of seller interest, but no bank interest.This just doesn't seem like a fruitful exercise to me, and I'd suggest learning how to analyze deals FIRST so that you don't have to make ridiculous offers that get you a bad reputation with listing agents (and it will).

If not beware you're likely to get the mortgage called.Do you know the right sequence to follow in closing the transaction so you don't open yourself to a future claim of possible insurance fraud or lawsuits because you have two policies and each point the finger at the other to pay a claim and in the meantime the bank finds out about the sub2 because of the claim and then they exercise their due on sale clause on you.Sub 2's are a great tool to buy properties IF you know what to do and how to do to minimize risk. 

I'll be exercising patience and hoping for miracles in the meantime.

Now these goals and plans may change over time as you get more experience, but doing this exercise will begin to give you a road map for your success.

Odds are the tenants won't exercise the option and then you'll end up with a higher mortgage to support at the same rental rate.

A good exercise for me though as I evaluated the opportunity.

Generally speaking, it is always a good idea to exercise "due diligence" in investigating these kinds of business interactions.