To validly execute contracts any other legal activities, the LLC must at least be registered in the state you are doing business.

Cap rates, location, and understanding the cost per door alongside your mechanicals and capex is going to be key when buying multi-family. 

If you truly want to be taken seriously in this business, you're going to have to put in a bit more effort.

In an  Office or Industrial project, competing business can co-exist as neighbors because they are generally providing a service for which the "playing field" is away from the property.

Any opinions out there on if I would have any legal right to get the earnest money returned to me or should I just be happy he is willing to let me out of the contract and consider the $2,000 em cost of doing business?

Just open a separate bank account, give it a business name and keep track of all income and expenses.

There is significant risk to this business and people generally only want to show one side of the coin. 

In general ADUs in single family zoned areas add less value than the hands off cost to add the ADU.  

Be proactive and set the right expectations before getting into business together. 

It seems you have done what can be done and now it's time to ask the question of where do you want to be in a few years when you recover.If you do a "strategic" bankruptcy (just a fancy way of saying starting over and doing better next time) you can be back in business debt free with bad credit and no creditors hounding you.