@Roger, your situation sounds unique and could present some issues if there is a loss at the location.

The tenant is on a month to month lease which I think would be beneficial in this situation.

Not knowing your personal financial situation, I would go for a buy and hold or owner financing.

Our situation is two fold and is as follows...Although to date we own 2 rental properties and have done 1 flip, we want to do a house hack/ renovation for our own primary residence to live in, build equity + possibly sell 5-10 years down the road.

Based on your response though it sounds like they are just responsible for hiring the attorney and managing the situation.

I am trying to figure out what the best thing to do for a friend is in the situation outlined below:Home Value $570kowed 1st mort $496k (current loan was modified and principal reduction completed for $100k reallocated in form of balloon payment at end of loan term)no 2ndarrears $30kIn process of going through bankruptcy, however, want to complete a lease with option to buy. 

The longer you are in this business, the more you're going to see that security deposits are a real problem in it.This is your first time in this situation and it probably won't be your last, and you'll be better prepared for it next time.

I would talk with them and get a feel for the situation.

Sign a new lease, use a M2M in a situation involving unrelated room mates.

Honestly I don't allow any pets so can't respond to a situation as absurd as yours.