The same scenario occurred where we got a booking right away and thought the reservations were going to keep flowing, and then there was a "pause. 

At the time, it never occurred to me that if you want to swindle people it is difficult and expensive to take legal action against a company that is incorporated in a different state than where they do business.

@ Dmitriy FomichenkoAt what point did the conversion and tax payment occur? 

You better reach out to them days before the auction and give them a simple choice: allow foreclosure sale  to occur or allow you to take it over from them, with equity justifying your purchase.    

The other option is a water supply line, but that would typically resulting a steady leak and the damage would occur faster.Really think about what is above that space that could cause the issue.

This is what I am encountering, in the current Mortgage Industry.If you think you will go FHA, Conventional, FHA 203k, etc. and then Quit Claim the property, to a Corporate Entity, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days.

Perhaps @Ned Carey will chime in but IMO the valuation should have occurred prior to bidding.

California does not have a law requiring deposits to be held separately (neither did Alabama when i had Alabama properties) and it seems like a significant hassle to address a virtually never occurring event (not having money to return deposit to the tenant). 

And it occurred to me that by purchasing this property I'll be increasing my monthly cashflow 25% going from 400/mo to 500/moOf course I'm not considering this in a vacuum, I have other factors to consider like appreciation, principle pay down, etc.

I was so caught up in the project in its entirety that it never occurred to me that they are 2 separate things.