The LOI is non binding and does not require a deposit, asking for a deposit shows that the broker/seller is not trustworthy. 

IF they blow their security deposit on other things.

If I do end up buying, I want to increase the rent to match current market.

I like the idea of having a clause in the lease stating that option 2 will go into effect if a notice of potential citation is received, but am curious if the tenants would end up just falling behind on rent because they have already requested that this first fine be taken out of the deposit when they move, due to current financial hardship.

Mike Simmons came up with these requirements after 10-12 years of having partnerships that did not work and ultimately finding one that really does. 4 Requirements when Partnering: Identical Risk Tolerance.If the person you are partnering with doesn't match your risk levels, and what is scary to one of you is the starting point for the other, you are going to have conflict.

Now they've sent us a demand for their security deposit back.

The matching quarterround is $3/lf, which is outrageous, but we'd just use white composite quarter round for $0.50/lf.OR, if you recommend a different product, please reply.

Each turn means more wear and tear repairs (not reimbursable through security deposit) so factoring in higher repairs/turnover costs could be worthwhile.  

I'm currently in the process of creating the LLC for the Checkbook IRA and I have a former employer 401k with +/- $41k that I can withdraw and deposit into the IRA. 

No good lender or LO is going to match the online undercutters who pay their telemarketer/call-center LO's minimum wage and don't care whether you close on time or not.Best of luck!