This California State Legislative code outlines which encumberances will survive a tax auction (see below in italics), and I want to make sure that a Deed of Trust with Assignment of Rents does not fit into any of these categories.

Then after they don't pay the lawsuit, you have to pay more money to try to enforce the judgement.

As far as occupancy limits enforcement does happen but it’s not super common and every case I’ve heard of for enforcement is due to neighbors complaints  typically noise or too many cars.

It's good to stay professional and show sympathy, but it's important you enforce the rules set in the lease agreement.

First, since they're negotiating over financing, it sounds like there hasn't been a meeting of the minds and there may not be an enforceable contract.Second, like it or not, they need to get (and pay for) professional advice i.e.

Side deals like this story are tough to enforce especially cause you can't call section 8 on them and per your contract with section 8 you are getting paid the contract amount so u can't evict them. 

Have leases so you can enforce them if needed.

STRs have been plagued by negative market news and legislative uncertainty. 

It makes it simpler to say no, to enforce something, as you are just "supposedly" working for the landlord and just doing your job.

Talk to the people that enforce the rules and see if there is a way to do this without breaking the rules and getting in trouble.If not, then just don't do it.