For example, if their lender drags things out and ends up offering mortgage conditions that are wildly different than what we have discussed then I would be forced to accept those conditions or lose $50k.I have also asked if they could lower their earnest money deposit demand to something more reasonable, which they have refused.

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Now, we are out of the identification window so we are left with either trying to save the current deal (which involves accepting terms that weren't initially part of the deal or call it quits and pay the capital tax gains on half of the proceeds from the sale.Are there any other options that would be worth considering?

It's like accepting a full year or rent in advance as a landlord.

What are some of the challenges an owner would have accepting this type of deal.  

The whole reason FHA developed a short sale method is to reduce the loan balance down to reality, down to what the home is worth, down to the value of the collateral at the bank accepted. if they had the cash, they wouldn’t be behind on their monthly payments.You're right I overlooked that part.

My business partner and I have been looking at multifamily deals for almost a year, even though we have been looking at bigger deals (50-150 units) reading stories like yours, keeps us moving forward and knowing that there is light at the end of the tunnel and we will get one of our LOI's accepted! 

Keeping it as one big space may set it apart from standard storage units, but you could also test demand with dividers for varied price points.

Percolation test.  

@Ronald RohdeWell, just waiting for seller to accept my offer.