How did their mortgage contingency get cleared?

That helped clear up the lingering questions I had related to 1031 exchange.

I also feel that the law isn't very clear.

Is the strategy of wholesaling lease option contracts within real estate guidelines if the investor doing the wholesaling is very careful in the marketing and execution of the process to emphasize he is only selling the rights to the lease option contract and not selling the property both with the property owners and to the tenant buyers and also clearly states he is not a licensed real estate agent?

In Texas, the limit on cash out loans is 80% and that threshold is still present but if you own your primary home free and clear your HELOC can now be up to 80% of the value of the property.3.  

Do the owners own the home free and clear?

They cleared it to close so it must have been some processor's incompetence. 

If that's the case, you need a bank alternative perm lender to do the cash out refi for your free and clear property. 

If all goes as planned I should clear my debt from my fishing business this season and have some money left over to invest with.

If you put it on your CC, you better have immediate plans of refinancing and getting it cleared quickly.