@Robert StarnesBy you paying the back taxes on the property you have been doing the estate a favor since 2019.Since you had contacted the decedent's family perviously make a small offer to the family up front but only if you can represent the estate as PR (Personal Representative)If the family agree's file for Petition for Probate as the proposed PR of your friends estate.This would be the only recourse I can think of for you to legally have an interest in the property..

Told us she wanted to stay in unit 2 and could not afford the proposed $2500 rent for unit 3, claims to have not told the (fluent) seller that she wanted to move upstairs.Tenant of #2 returned the applications as she filled them out but seems her roommates work off the books as well.

My first guess is 1) tour unit and get lots of pictures with measurements 2) sketch up layouts as-is and proposed separation 3) talk to city?

I have cash and would like to learn from the project, but am early in my REI journey and am not sure how to proceed with how to analyze and formulate a proposal to the seller before she decides to list.  

The positive, what you propose is legal and a local CA jurisdiction cannot override the state law.  

I'm building out a proposal to buy out siblings on 3 rental properties that are part of a future inheritance.

Then I call the broker listing the asset for me and gather more info about the prospective buyer and how to formulate a counter proposal.

Alternatively, you could propose a lease-option- in this case you put down a non-refundable deposit, pay for any repairs yourself, and buy within the time frame you discuss. 

I have a business partner who lives in Canada and we've successfully worked with a few hard money lenders and private lenders, who we can reommend to you as well, doing just as we've proposed here. 

I proposed a lease with an option to buy agreement and explained to him all the benefits.