Start by reading the Ultimate Real Estate Investing Guide: https://www.biggerpockets.com/guides/ultimate-real-estate-investing-guide/introduction2.

Ultimately, we've decided to hold off and pay down our outstanding debts and save for a cash down payment on our first rental property.

Start by reading the Ultimate Real Estate Investing Guide: https://www.biggerpockets.com/guides/ultimate-real-estate-investing-guide/introduction2.

My main concern is regarding cost-basis and future capital gains tax when I ultimately sale the property. 

Remember, if you have a contract and can't ultimately assign to a third-party, you're still responsible for closing on the deal unless you have a way to terminate the contract prior to the closing date using a weasel clause. 

Its what get's you deals brought to you, its what gets capital flowing in your direction, and ultimately what creates success.  

Ultimately, it sounds like they did you a favor but that you need to curb the behavior to prevent unnecessary work and being over charged in the future.We have run into issues like this many times in the past.

Ultimately a personal decision.

It is quite frustrating for sure and there are no shortage of people who take advantage of others but, ultimately, unless there is significant money you are loosing ($25k+) from this due to their lack of disclosure, it usually isn't worth your time.

You could also look at selling the "paper lots" in advance of building out the infrastructure, but that depends on your financial ability to take this from dirt to finished product, and ultimately for holding long-term if that's the goal.