I've heard NV, UT, WY are states the have more personal identity protection, however you will still have to pay CA taxes etc.

if i were you, i would take a sample and have it tested just to have it tested. if it is mold, there are 18 different species of black mold and only 2 are toxic. that advice is coming from a licensed home inspector with a mold certificate. if it is black mold and is toxic, then you can remove it yourself, but protect yourself too. make it part of your offer. if the seller doesn't want to accept your offer based on the mold, then walk away. if you do not want the place because of the mold issues, would someone else want it?

The only bank that would EVER actually go to sale with money would be a junior lien holder trying to bid to protect their lien position and keep from being wiped out (I do it daily when I'm the junior lien holder).And while I agree that it can take months to get the foreclosed property on the open market, it's not because they are just sitting there.

So you will be making the payments on the underlying "first" position loan to protect your position?

The property requires about $15-$20k of exterior repair that the tenant is willing to do.This seems like one of those too good to be true deals.How do I protect myself here?

Consumer protection law.The biggest tenant problems I have had are with tenants I inherited with low security deposits.  

Although I'm not sure what I am protecting myself from.

I would only add that while they are the majority player, Fannie/Freddie aren't the ONLY secondary market out there.

What are the risks of not using a lawyer and relying on title insurance for protection for a deal of this type?

Don't know about NY but here in Texas the Consumer Protection Division of the Attorney General's office handles tenant complaints.