(Bad credit is phone bills to collection and visa often late).The exit strategy is repay the property tax and put on mortgage on an 15 year amort so it will have at roughly 75% LTV in 2 years and refinance with a MIC.My concerns are as followings:If they do not pay I will either lose roughly $20,000 assuming an exit price of $130k or own a property (it's a duplex) that would have roughly IRR of 8% on a 3 year hold in a town that I do want want to own a rental in.The borrowers have enough money to pay as things are now.

Your QI must take title to the new property with an entity called the exchange accommodating title holder (using your funds in the exchange acct. is fine). 

I also interviewed the CEO of the Pittsburgh Cultural Trust(One of the largest RE holders in Pittsburgh) one on one.

I am paying cash so no lien holder but I still want to insure the property.

You don't have to do this if you don't want to, however first may start a foreclosure process and eventually your property will end up at an auction block again.Assuming that your 2nd question refers to purchased 2nd position mortgage note (from the 2nd position lender) if the first lender started foreclosure and you are in the 2nd position, you can only claim any surplus from the auction since you are 2nd lien holder. 

If the 1st mtg is the one foreclosing, all other liens except HOA debts and property taxes get wiped out, assuming the other lien holders were named/served in the foreclosure.

However, the rules also do not permit the IRA holder to use an asset owned by his or her IRA.

(I am assuming, as deed holder, you would want to carry insurance no matter what)4.

My question; Is the lien holder protected if I let the property be sold at the tax auction?

That is SUPER important if you are the note holder.