Unfortunately, we do need out of House #1. 

Unfortunate that you were not told this upfront back when you started the house hunt, hopefully some lurkers find this and benefit.

Hopefully no other city follows but unfortunately once one starts it can set off a chain reaction.

There are great reasons to use this type of lending in certain circumstances such as house flipping. 

Unfortunately, there is no public sewer available in this town. 

Unless there's some extenuating circumstance (you're a GC, you're an agent etc) you should deal with as many business resources as you can and you definitely should not be using private money from inexperienced investors until you know how to handle it properly.

Let's assume:nothing is brokennothing is amazingall major items are "fine" (it doesn't need a NEW roof, but no major leaks)no poolno car ports or garageno dog parkmixed units 1/1, 2/1 and 700-850 sq'water, gas are billed If you are about to answer this with a: "Well it all depends on the circumstance, no two properties are alike." please move on.

Looks like we will have to bear the cost unfortunately. 

Which is unfortunate being that the insulation is in question and I need new windows.

However you unfortunately, I believe, are going to be stuck speaking with a construction attorney in regards to the matter (the only person who can give advice on what to do legally here, no one in the forum who isn't an attorney can give legal direction it would "practicing law", i would think you could easily get a consultation), even though what your saying in broad terms seems like a definitive violation it all comes down to what does the contract say and more importantly was it written properly and in a way that can be enforced in an expeditious manner.