Basically, if she had not chosen to take her cash out, we wouldn't be having to pay this.Anyone know how a more formal agreement would have been structured?

The trustee told me that I do have a temporary deed and the formal deed will be mailed to me within 2 weeks.  

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The redemption rights belong to the former homeowner in a judicial foreclosure sale.

You have a partnership without it, but its better to formalize that. 

My problem is I'm in Texas, a non-judicial foreclosure state.

there is a group of us that get together for lunch about once a month, nothing formal just chatting and sharing.  

In this, you'll need a judicial foreclosure with the breach of contract as the occupant/optionee has an equitable interest. 

A few caveats - 1. wether permitted or not, if you're renting the basement of your SFR you really need to be judicious about who you rent to.  

I don't have any formal design training but have been researching lots of design pics and I preview lots of property.