Does it pass all of the requirements for a legal apartment — egress, window size, etc.  

My question is what is the best way to legally structure to protect us both and also best structure tax wise. 

The main benefit is you don't have to deal with bank underwriting/approval and typically need less than 20% down.

If they signed the lease, then it's a legally binding document that is enforceable. 

Thanks, That doesn't sound illogical for the actual mapping process costs from Civil and city fees - I haven't done a 34 unit mapping project, but everything I've experienced suggests costs are less than linear as number of units increase.I would doubt that $100k budget includes right of way or utility work.Does that $100k include legal fees associated with HOA creation and establishment?

Maybe a local lawyer would provide a free or low-cost consult and give you the legal details you need.

Also the basement may not conform to a legal apartment due to egress and window regulations.

@Brian Krause a conventional lender cannot legally lend to an LLC...pretty standard stuff...what kind of loan are you looking at?...

A legal path to do this or any deal is to get the deed, and then sell the house that you own.  

but your right real estate can be transacted between parties don't need a lawyer or title or escrow company or agents or lenders or anyone but the two parties.. when foreclosure rescue lease back in our state was legal I did a ton of it.. and there simply was no time to involve anyone.. when the seller decided at 10am on Wednesday they needed to take Massive action and their foreclosure was scheduled for the next morning..