I'd say you handled the situation well by explaining what you do, how it works, and why you deserve to make a profit for the service that you render.

I plan on having my real estate attorney drafting all the paperwork if he is ok with whatever option, getting an inspection and appraisal done, pest inspection and having a local title company handle the closing and other related items.

But they then stated that "seeing as they won't take the door with them when they leave, how would I like to handle it - should they just take the money out of the rent?".

The standard purchase agreement does have this but depending on who is handling the REO, they will have their own paperwork so to be on the safe side you should have your agent include an addendum that states utilities must be turned on.

My thoughts are that they would need to be rescreened based on the income of the two people as only two people would be moving in before they find a 3rd roommate and resign a new lease.I'm trying to figure out the best way to handle this situation as I'll be letting some people down no matter what I do.  

Because we are not super desperate for cash, and don't have to make a mortgage payment till April  we can handle the turn over.

You can handle repairs without a license, but the leasing and marketing activities require a license.

Right now, I am just handling vacancies and non-paying tenants.  

How would you handle this?

Hire a collection company that works with HOAs to handle the entire case.