Is the conversion legal as in they got U&O for 2-family and zoning supports it? 

Then explain to him what the term DUE BY and GRACE PERIOD mean. the rental agreement or lease must disclose: the name, address, and telephone number of the authorized manager of the rental property and an owner (or an agent of the owner)who is authorized to receive legal notices for the owner.

It would be much more simple to do steps 1-4 than to legally create a loan. 

I apologize if this is a stupid question but I'm a new real estate agent and I want to make sure this is legal.

Legally it is possible to sell without his signiture, unfortunately a napkin agreements makes your life complicated.

You won't be the legal owner of this property until you settle with the trustee.

You also have to deal with an HOA that may be hostile to landlords or have restrictive rules that make renting out a property difficult.Also, if your hope is to build wealth with buy & hold real estate, returns are terrible if you pay cash. 

You have no legal interest and no one that has a legal interest wants anything to do with it according to your post.

If you had your own attorney handle it, then they should have insured that your loan is properly recorded, so not a lawyer, no legal advice, but I'd think that worst case, you'd need to foreclose and take the house back if he doesn't perform.   

Instead of just giving them the money she wanted it to do legal way.