The strategy discussed was to fix up the unit and rent it out to a tenant (with full disclosure that the home would be foreclosed on) at a fair market price.  

It sounds like you don't want a rental - so you need to look at your options to sell...owner financing, conventional, etc.You could do an Executory contract as a means around the 180 day limit but would seek legal guidance as there are lots of disclosures and risks with that route.Also, I assume this is residential - the requirement does not apply to commercial or investor purchases.

(Disclosure: while I only own one property, I"m certainly not a seasoned investor but I've been lurking here for over a year and taking it all in) BUT, If someone is going to take the chance and purchase a $40,000 property just to be able to get in the game, the responsibility is theirs to do their due diligence.

Were there any disclosures about the loan risk in your offering documents?  

Usury laws, disclosures, and the list goes on...Most private lenders stick to investment property's.

In full disclosure my business partner is the President of the REIA and I am an active component in it as well, but it is a great place to network and learn new strategies and skill. 

From my research, it is true in most states unless you give the tenants full disclosure beforehand and have their consent in writing or on the lease rules and initialed.

Our Realtor freaked out just by the fact that we had to sign a disclosure document to even see the property, as the listing Agent's company did not want to be held liable if anyone was dumb enough to enter without the proper protective gear.

I dont know if there is a non-disclosure agreement, or another legal document needed to barr this kind of action, that I would need to protect my (and my mothers) property.

@Lyuba BarringtonFull disclosure from the initial contact is a must.