You should feel relieved that he is going at this stage and that you have two months rent to cover your time to find a good replacement tenant.I would continue to demand the additional months rent according to the legal contract and threaten to take him to court to collect.

I will be contracting the house myself and doing a lot of work myself. 

What can I do to the existing structure physically or in a contract to reduce liability?

Can possible sub divide lot.over 5,000 sqft all brickrehab estimate- exterior 40,000... interior 20,000 per unit x 4= 80,000Total Rehab $120,000Seller Asking PRICE $175,000Present mortgage $125,000 @ 7.2% 30 year term (was originally $152,000 in 2004)No second liens2 units are occupied (don't see how with all the deferred maintenance) and supposedly collecting rents $600 eachThey originally offered a "land contract" at $175,000City assessment- based on land and structure $203,000All units are metered separately- electricity, gas, water, trash etc...The good news....pro forma base upon what I know about that area.

I currently live in Germany working under a 3 yr contract but would like to get into my first deal.  

This is determined by your contract. 

That's a fair criticism and one we'll take to heart.

I've never visited an inmate - trying to figure out if there is a way I can get him the contract without actually visiting him in person.  

Repudiate the contract?

I would get house under contract for a very low price, then see if you can negotiate with the IRS for a few hundred.