Another few days went by of negotiating and she had accepted and signed the contract.

You definitely have to watch out for IRS Liens, which are not wiped away (although they can be negotiated), unpaid taxes (going multiple years back), and also HOA Liens and other unrecorded liens. 

I stepped in and negotiated these all out for them. paying a bunch off foreclosing on a bunch etc etc. they got out of it by the skin of their teeth but lost ALL their money.

I would definitely try and negotiate down the price.

It also happens when an investor buys at the foreclosure auction, but then negotiates with the note holder to buy the promissory note, also.If there were outstanding junior liens at the time of foreclosure, and the borrower redeems, then all those liens revive against the property.

How much else you raise and at what terms is totally dependent on your network and negotiation skills.

If the buyers feel like they should get more money, they can do one of three things:1) re-negotiate with you to amend your original contract2) walk away from the closing table and refuse to sign (basically bringing the deal to a halt)3) suck it up and sign.I can't imagine a closing attorney would hold money back for any reason, unless he had it in writing and signatures from both parties that money was to be held back... that seems beyond me. 

My question is could my buddy negotiate a short sale w/himself as the end buyer?

Also looking for advice on how to negotiate the current deposits that the owner should be holding for the current tenants.  

You subtract or add to the home that you are looking to give you an idea of the appraised value.Now as for the price you actually pay depends on how much repairs and negotiation you do.