It's a no loose situation as long as your nice and professional with them.   

I am bound and determined to purchase another multi family home within the next 6 months, using one of the units as my primary residence while I renovate and rent the other unit(s).

you will be paying probably about $2,850 in mortgage payments ( 540,00 @ 4% for 25 years ), so 3500 + 2850 = $6350. right now that is a loosing property, if you are sure you can value add by increasing the rent, then you can make about a $1000 / month. do not forget to add in the CAPEX.

Figure what you have to do to take leaps and bounds to the next stage.

Any ill-will felt by turning him down will be far less than the ill-will when you loose your shirt on it.

Don't fight the city, you will loose and get black listed - all the sudden they start poking arround in your building and records.

This is a good thing as it kills two birds with one stone: 1) it gives you a chance to practice your chops without worry of loosing a deal  2) eliminating people with fantasy land expectations continually dials your list in tighter.

I'd say you are more likely to loose a ton of money than go to jail if you don't watch you contracts.  

So...a quick update.My agent and title company got a message from Sage's "extension processing team" to submit for an extension (number 5) within 2 hours or we might loose the property. 

Pre-payment penalty - some lenders require minimum yield, converted to minimum number of months or years that you must not refinance unless you cover the minimum yield (yield is used loosely here).