Being that you don't know him that well - the potential of $3k in profit does not out weight the risk of injecting $10k into this deal. 

You already got $400 that he didn't owe you, I'd be happy/cut losses and move on.How much will this cost to repair versus cost to sue?

The process was pretty typical for loans I've done in the past, except I was actually asked to provide a Profit & Loss statement for the current year to date.  

I would say just cut your losses and start over in FL.

Otherwise, the balance due will just continue to grow.Otherwise, consider a Cash-for-Keys surrender to get possession back with minimal losses (ie balance still outstanding).

So while we have a  quicker eviction process to hopefully limit a landlords losses collecting for damages is difficult at best 

We will pay no more for loss of, or damage to that property than the proportion that the Limit of Insurance under this Coverage Part for the property bears to the Agreed Value shown for it in the Declarations.b.

My question is hypothetical, though at one point I was considering buying without much $$ down on the assumption that any penalties I took in financing would be offset by losses on not being able to jump in at the bottom of the market.

Sometimes you just have to cut your losses and move on.

Unless you have enough passive income to offset, passive losses do you no good.