Let said the property is heavily damaged from a natural disaster and the buyer default because he can no longer live in the property.

I'm not a magician to be able to predict when a wire underground will go bad and cause water to stop flowing, it can happen to anyone.

A poorly construed option is an installment sale, that can cause you a tax matter, liability for depreciation applied even if you didn't receive the funds. 

(BOA)  I do not want to put myself in a position that might cause them to call the loan.I wonder if I could refinance the property plus enough to make repairs and hire a contractor to get it back in shape.  

Due to the type of tenant and high turnover with damage to the unit and collections the scale might not be large enough.You could have 50 units at 1,200 a door and possibly have a better quality asset and more stable tenants that do not work 2 jobs to get by and rely on charity and government type assistance.

The inspector did point out some evidence of water damage on the ceiling and stated it might be from the upstairs bathroom...it tested negative for moisture but probably bc the unit was vacant at the time. 

- he said even though there was evidence of water damage to the sheetrock that it was dry and not wet and given patching evidence it was probably fixed. 

If you work with local accountant I recommend speaking with him regarding this cause things can vary state to state.

Failure to pay those debts can probably be constructed into some form of self servicing cause.  

Sounds like they are breaking their lease cause they are moving for work.