Generally, you should be able to option the land for a nominal amount of earnest money paid  into escrow for a reasonable diligence period while you gather information, the option money returnable to you if you find out something you do not like, including any defects in title that show up on the preliminary title report (usually delivered to a buyer for the buyer's review after entry into the option or purchase agreement and prior to the earnest money becoming non-refundable to the buyer.)  

We had several phone calls in May and June and I sent them some documentation on the project.My project has developed to the point that I can make first submissions to the city for preliminary review.

Without answering your question directly, here are some the thoughts just off the top of my head.Look at the last tax assessment for the % land compared to the structure %, then figure the market value of the place unburned.apply your land %.Less Scrape Cost to get the old debris out to the dump (including any insurance needed to have workers on the site).Can you reuse the utility meters, drop and electrical breaker panel--if so keep them.Same with kitchen and bath things.This will give you what I'd call "Preliminary Reference Book Value" for the lot--post loss. 

You'll have turnover costs for sure, but you get to screen and place your next tenant.If this was a big deal for you, you could back out of the deal, but I'd wager to bet you would get sued for specific performance.

We have a signed lease and deposit with a couple that love the house - they have expressed interest in executing a purchase option and we have put some preliminary terms in front of them on that subject.Anyways, one of the challenges with the house is that it's so unique. 

The owner mentioned his checkered background, which appears to jive with a preliminary search.Prior to getting a lawyer involved, my question is; what is the best way to determine if there is indeed an IRS lien?

I won't blowing out walls to make it larger.Here's a preliminary layout of the proposed kitchen.  

If you're interested, I do a video podcast (brand new), where we spend 30 minutes assessing your deal (after some basic information gathering and preliminary design layout).

Just tell them you have partnered with  an investor, your job is to find deals and do the preliminary ground work and then discuss with partner to see what price you/he can buy it for.Seriously, people are very receptive when you are 100% straightforward.

There will likely be fees for the application for the lot line adjustment, costs for plans by a surveyor, notification to surrounding property owners, preliminary title searches on both properties (which you may have from the purchase), new legal descriptions for both lots, and recording of the new title information for both lots.