It is not abnormal to get involved with a seller who has some back taxes.This story might make sense, but he will have to get a release on title for the forgiven mortgage.  

Most if not all HML's will release the rehab funds in draws, and if you completed all work they "should" release the last draw to you.  

Once you get deed get a Quit Claim deed from previous owner and a mortgage release from bank.

Pending sales in San Diego, San Bernardino, and Los Angeles counties declined from last May, but those counties had drops of less than 5 percent.http://www.prnewswire.com/news-releases/california-pending-home-sales-stumble-for-fifth-straight-month-in-may-car-reports-300480998.html

We track down the old owner, get him to sign an affidavit releasing any potential ownership in the company, and get ourselves a fully executed contract!

There are still ways to get you separated from them and retain  your tax deferral but it does become a little more complicated.If the bank is willing to release the lien in favor of a pay down and/or substitution of capital that too is fine.  

Now, since the deal fell through, they want me to sign a paper releasing the money to the owners.

Based on the link Account Closed mentions above, it would seem like a good idea (if legal) that at the time that you create a note with someone, that one of the loan documents you have them sign is an "authorization for release of information" specifically naming the current or any subsequent first priority note/mortgage holders that lasts for the duration of the time while your note is unpaid.I think it would pretty easy to get that document signed before you give them what they want (money) and maybe a bit harder when they are going through a difficult time.

Depending how it reads the HOA might not even technically exist yet until all the units are sold and the developer releases control.  

He wasn't allowed to show the appraisal until the VA "cleared" it to be released.