If there is anything left over after the sale, it goes to the IRS then to the state and finally back to the borrower, in that order.No, you don't want to work with a title company to make sure those are paid. if you are bidding, and you win, those get paid through the foreclosure trustee/attorney if any left over after lender is paid and if not, they get wiped out (IRS has redemption rights for a period of time) and don't get paid (All things being equal).

Are there any other actions I can take that result in big "wins" for the amount invested?

That being said...Is it enough to simply transfer the funds from the security deposit account to our operating account as paid rent for the next 2 months or is it necessary that I refund the money to them with a receipt, have them sign the addendum, and pay their rent themselves as usual? 

When you do select a applicant, better or not, you simply tell all the rest that their application has not been selected and the unit has been filled.You do have that right to reject on a feeling, appearance, attitude etc.

My attorney explained that I could fight to keep the home, ask the bank to buy me out plus a percentage or simply ask to be reimbursed for my time and expenses.

The bank wins with 70% equity in the deal, the seller wins because they don't have to pay capital gains on the entire purchase price and they get to collect steady cash flow for the next 30 years, and I win because I get the deal done with nothing down collecting the cash flow, capitalizing on the depreciation of the property and writing off everything in between. 

That's amazing Account Closed, just simply amazing.

The potential buyer and their agent called about 10 Companies for home insurance but none of them would provide coverage because even though the panel has been upgraded w/in 10 years, the wiring is the old knob and tube.

Will insurance give me money even if I decide to simply walk away?

It depends on how competitive the market is. 30 days for due diligence is nice but sometimes you only get 2-3 weeks if you want to win the deal.