My understanding is only when I, the buyer, go beyond my permitted window to conduct an inspection and try to walk away from the deal?

These emerging submarkets will begin to see an influx of capital into home flips, renovation of office/retail centers and permitting for new construction. 

Some require you to get permits and register for room tax.

The unknowns I have had to learn the hard way are everything you can not see using one point in time (pre buy inspection); i.e. subfloor wood rot in your crawlspace that no one caught (even though 4 people were down there at different times), permits (have people pulled them in the past for big things that were done on the property), septic drain lines (septic tank was amazing, but the drain lines were faulty had to get a permit and get the city to do an inspection and called for a 7,500 repair and partial mound system to be installed....when the original inspection and pump was aok because it was a dry time of year)...., speaking of time of year, a HVAC unit that was inspected in the winter and the differential was AOK, was inspected for a closing in the summer and had to be completely replaced (4k-that I wasn't supposed to have to spend), drainage issues on the property and water intrusion......no body really inspects for drainage issues prior to closing, especially when it's a dryer time of year, then BOOM the rain hits and water is coming in over the foundation because water is not being routed correctly around the house.

First review your landlord tenant laws for your state.I'd go over in depth the language, even if it's only on  notebook paper of thier rental lease / agreement... it has some terms that you should be able to really enforce,, if it's not stated on that paper that a sublease is permitted then "GOLDEN TICKET" .. you have cause (in my view) to file proper notice of lease violation and get them out.To have a attorney to review this is SMART money spent..

Do resolve this and get a permit while under contract.

Stat. 504B.161 permits just this type of system, but only if agreement supported by "adequate consideration" and "in a conspicuous writing." 

Week of 4/9/18We’ve started the permitting process with the local codes dept.

I've listed my high level outline below, and welcome any feedback.1 - obtain all building permits for the property - understand what's legal and what's not2 - talk to the city development person to see whether I can legalize the current illegal units and bring it to code, or if I'll have to remove it3 - after understanding what needs to be done with the property, talk to a home inspector to identify which units are in compliance and what's not (also get all the standard inspection items)4 - work with a general contractor to get a $ quote for necessary jobs on the property5 - bake those numbers into analysis to determine whether to buy6 - discuss property details with lender and get an appraiser's input7 - submit offer after passing all criteriasAs a first time home buyer, what else have I missed?

I understand there are plenty of owners who will turn a single-fam dwelling into 2 or more units without the proper permits or zoning since that is expensive and raises taxes.