You are spending real money in attorney costs to defend yourself from a baseless claim.My stance would be, and has in similar circumstances, to move on and wait until something real is done.  

As others have said, provided your contract allows for it, fire him immediately and give him a Criminal Trespass Warning in writing so he doesn't enter the property under any circumstances.

We also live in a very expensive market (Seattle metro area), so finding something that will be the best deal considering circumstance (i.e. living in it for 3-5 years before renting it out and being more of an appreciation market vs. instant cash flow).

I'm concerned that because of the current moratorium on foreclosures that many potentially-motivated sellers may not be as motivated as they would be under normal circumstances.

It is my understanding that you cannot have more than one FHA at a time unless there is some type of outside circumstances (I would be assuming none of these) or you were to refinance to conventional, but I do not see myself having enough equity after the first year to do this.

For what it's worth, and so you're aware, doing it the way you proposed may not even be legal under some circumstances and in some states. 

@Victoria Torres Do not use Quicken Loans under any circumstance.

Tax mitigation strategy should take into consideration your facts, circumstances, and goals. 

However, this would have to be a very special circumstance and is not easily done.

@Robert IovineOh, I see...I did read about one way, but its only for very specific circumstances and this doesn't look to be it.