I don’t think it’s exactly legal but oh well!

I know legally it can be done but tax-wise how would this be done? 

This seems like it could create all types of problems, but maybe I am just unsophisticated. you can transfer title sub too that's legal.. what you have is alienation of title.. and alienation of title is an event of default.. in an event of default the lender or holder of the note and mortgage may at their choosing accelerate all payments due and payable.. that's the riskthe land trust while nice is still an alienation of title.  

Some will come along and say start a formal eviction and legally do things by the book and lose money for the next 90 days waItIng ..stIll others will come along and say pay the guy cash for keys strategy to persuade hIm because Brandon says it’s a good idea in his book .

You will be legal and everyone will be off your case.

I am not giving you legal advice, but hypothetically if you were to refi owner occupied and intend to owner occupy - then hypothetically you found another property that you like that changes the original intention, you are hypothetically good to go.

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?

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.