They certainly caused me to lose money, my buyer, and time, but are the liable for this loss legally? 

Here's a discussion about that exact topic: Lease Option and Dodd Frank: is it legal?

Does this valuation principle apply to all apartment buildings with 5 or more units, provided that all units are legal?

I get mine prepaid once a year. 

It isn't an entity in and of itself; it's an election for tax purposes only.For example, you can't "form" an S Corp - you form an LLC or C Corp and elect to have it be taxed as an S Corp, which doesn't change the legal status of the entity. 

If legal they can redtag your home when something should not be done without a permit so treat him with respect but to be cautious.

That is very hard with off market deals, because the information about the property is often times hard to get - there is no data sheet about the property - and you are operating in a legally less regulated space.

I’m not sure if this is legal but my agent is telling me that 3 tenants would like to stay.

Any attorney who advises you to pursue something is just looking to collect a fee....what’s the legal claim, “they don’t like me”?

if the owner is paying the utilities , go count the meters and verfy that the buildings are legal 9 families, there should also a public landing meter for each building for the hallways and out door lighting . i dont know what state your in but also make sure the tenants aren't on some sort of programs where the landlord is required pay the utilities to have the tenants .