I am not giving you legal advice, but hypothetically if you were to refi owner occupied and intend to owner occupy - then hypothetically you found another property that you like that changes the original intention, you are hypothetically good to go.

They certainly caused me to lose money, my buyer, and time, but are the liable for this loss legally? 

Here's a discussion about that exact topic: Lease Option and Dodd Frank: is it legal?

Does this valuation principle apply to all apartment buildings with 5 or more units, provided that all units are legal?

It isn't an entity in and of itself; it's an election for tax purposes only.For example, you can't "form" an S Corp - you form an LLC or C Corp and elect to have it be taxed as an S Corp, which doesn't change the legal status of the entity. 

If legal they can redtag your home when something should not be done without a permit so treat him with respect but to be cautious.

That is very hard with off market deals, because the information about the property is often times hard to get - there is no data sheet about the property - and you are operating in a legally less regulated space.

I’m not sure if this is legal but my agent is telling me that 3 tenants would like to stay.

Any attorney who advises you to pursue something is just looking to collect a fee....what’s the legal claim, “they don’t like me”?

if the owner is paying the utilities , go count the meters and verfy that the buildings are legal 9 families, there should also a public landing meter for each building for the hallways and out door lighting . i dont know what state your in but also make sure the tenants aren't on some sort of programs where the landlord is required pay the utilities to have the tenants .