If the seller is willing to negotiate the sales price to mitigate the costs of making it a legal rooming house, it just might be worth the hassle. 

I negotiated a price of 72k cash but did not put paperwork together because I do not know if I'm actually dealing with the rightful owners.

So I got a real good education as we talked about everything from due diligence to negotiation strategies, operations, property management, tax strategies, lenders, financial analysis, etc, etc. 

im 21 years old and I took an interest in real estate and i want to get started with whole saling. i understand that you need to find a house below market deal and then negotiate a contract with the homeseller. my question is how exactly are these contracts executed and do you need money?

Maybe write at least one offer based on the terms YOU need, and negotiate from there?

EXCEPT I knew they were not going to be happy about this since they were so hesitant to come down on their pricing when we were negotiating.

You need room to negotiate to the MAO.  

She told me that she's not an attorney but she have been told that this process is a negotiation between me and the original owner.

Hello BP,Whenever you find an FSBO property and you are able to negotiate seller financing with the seller.

Since it was foreclosed, the bank takes no responsibility for the state of the building so if it turns out there is major deferred maintenance, you may not be able to get FHA financing and the bank won't negotiate or do repairs beforehand so you will be out of luck.