Paul,You typically pay 1 full year of home owners upfront (to the insurance company) than on top of that you will escrow between 3 to 5 months of taxes and insurance upfront.You mentioned flood insurance as well so first year  would need to be paid in full prior to closing to provide evidence the insurance has been bound.

Property is relatively cheap compared to many places we might go from here.

I also fully understand that your broker and their ops manager do not see any problem with refi of a property where a purchase option is in place - and this may proceed without an issue, of which I certainly hope that it works out for you.Just be aware, I've encountered this exact situation where everyone said it was fine and even the underwriter expressed no concern when asked about it in advance - but just prior to closing it suddenly became an issue when they pulled title and saw the cloud.

@David Coronado,When shopping mortgages you need to compare the lender fees.

How long are comparable properties on the market?

Where as if you hop from one lender to the other yes they may offer 12% compared to 13% but is that 1% really going to benefit you more than building loyalty and trust with a company/lender that will save you 10% interest down the road?

I'm also curious as to what the cost difference between doing just the upper floor compared to both the upper and main floor.

People I know and trust have been going through 100 MF deals to find one.I've been burned (well, maybe singed) from prior bubbles. 

Commercial property loans are notoriously more difficult to see through compare to the residential loan.

He also stated he had not had any prior evictions on his application.