So, I'm thinking the way I should go about this whole process is to create an addendum extending the contract term by 45 days, but allow the inspection period to remain the same, request a down payment from the buyer of $1,000, and stipulate that the seller has to provide the 30 day notice for the tennant to vacate after the inspection period has ended.  

What reasons can you think of for the tenant to find it in their best interest to pay the ETF and move on other than not having to pay for the duration of the contact?

Unfortunately, our lender would not extend us financing on this home due to its condition.  

To what extend do companies who service loans get involved in collecting late payments, etc?

If it is longer term, the rent is usually fixed for the duration of the contract.

I would think it is a viable option to consider as long as in moderation and not over extending yourself.

@Jefferson Gan, most HMLs will want a lien in 1st position and since you are keeping the sellers mortgage in place, it will probably not work.You might be able to find private money to fund the rehab.Depending on the equity see if seller can get a HELOC and extend that to you at a higher interest rate - say 8% to 10%

You will be surprised at how many additional leads you can get from your friends and extended network, by simply letting them learn about what you do on your personal facebook. 

Other options I'm considering are a $10k down, $30k note, or if he really wants more money, extend the note to 15 years, and higher principal. 

A key thing to consider is whether or not you can cover the holding costs for the duration of the project.