He ended up explicitly asking for a refund, writing: "... this should be open to some sort of refund.

Since the current it is an ARM loan we are going to refinance anyway and wondering if it's better to refi in my name only.Thoughts?

Using your wife's self directed 401k to invest in a C corp RE operating company that you run would not be an "arms length" transaction, and thus be prohibited.

If he's going to stiff arm you $2.8 million purchase or slightly lower, but in your analysis it shows you making 12% Cash on Cash every year (hypothetical situation) well it might not be the worst thing in the world to overpay a bit (and overpay is in the eyes of the beholder).

It will be exceedingly difficult to convince a judge that the "additional rent assessed only in cases when the standard rent is late" is not a late fee; also, your lease agreement with the tenant would need to explicitly categorize the not-a-late-fee as additional rent. 

There is no "best option overall," because it depends on your goals.HELOCs are either ARMs, or have terrible interest rates.

Also, nothing you don't already know and stated in a different way, but to emphasize an important point I'd explicitly state that there is forced rent growth and market rent growth, just as there is forced appreciation and market appreciation ... both are important to consider in the short and long terms IMO, but both are created and treated very differently. 

I think that's called and arms length sale.

Some great encouragement @Dylan Vargas I will see if I can reach out to someone if I can find someone who doesn't want to charge me an arm and leg to look at my situation in depth.

I'm standing in the middle of the street, in the pouring rain, waving my arms.