He said I have 3 options:1) Remove and replace the walls that have the peeling paint.2) Cover the existing walls with drywall (or some other building material) to enclose the peeling paint.3) Scrape and paint.My contractor is lead based paint certified, so we are going with scrape and paint.

You should feel relieved that he is going at this stage and that you have two months rent to cover your time to find a good replacement tenant.I would continue to demand the additional months rent according to the legal contract and threaten to take him to court to collect.

Here are my numbers:$62,500 mortgage $540/month for mortgage payment, taxes, and insurance ($6,480/yr)$675/rent ($7,425/yr at 90% occupancy)$80 cash flowMy overall goal is for retirement so I am happy with covering all expenses and not taking any money out for myself. 

Yes if you have tons of reserves to cover yourself when the sh*t hits the fan, then sure....you can ride the storm when your are leveraged up the a$$ and it all tanks....but most people that are leveraged that high do it because they don't have the reserves sitting around.......they cant weather the storm for 2-5 years until they can break even again.....It surprised me how many people are back on the gravy train of leveraging the hell out of everything because it will never go south again....dangerous road.

The upstairs is rented for 250 per month (I think it's a fair price based on condition, layout, and size) and I'm considering making covered stairs but that will cost a few grand and take some time to recover. 

I've read/skimmed through dozens of airbnb threads but there are just SOOO many on this site covering a wealth of topics it's hard to find all the advice I am seeking. 1) For those of you living in a property that you also rent out (either renting out extra rooms or renting out while you are temporarily away) do you attempt to deduct your utilities?

If you can't cover that expense the property isn't worth it imo

What if I write him a check to cover legal fees, call it EMD, get a copy of check to title company, and file an affidavit of equitable interest and require the EMD back if he fails to go through with the sale after probate? 

If you go with a 4 unit property the cash flow may be enough to cover your mortgage, if not have money left over at the end of the month after expenses even with an FHA 3.5% loan. 

You can't keep rent for months that you kicked them out.You could require that the walls be returned to the color and condition they were in when they vacate, and use the deposit to cover it.