David,Insurance policies for flips are structured different than those created for buy and holds.Flipping policies will give you coverage during the renovation time period as well as any long term vacancy, usually more than 60 days.A buy and hold policy expects the property to be rented and can deny claims related to major renovations or during a long term vacancy.There are specialized insurance programs built for flipping that most flipper will use. 

Buyer's loan has been denied after financing contingency has expired.

There are a lot of costs involved though. 

I am not an attorney but I think deals involving real estate must be written.I also don't understand when you say you offered him $135,000 with a $1,000 option fee and then paying him $1,000 a month.Do you mean you are currently renting from him for $1,000 a month but have an option to purchase it for $135,000?

I have some old friends involved in small rehab projects in the city.

Get them on board sooner than later and get them involved as the boots on the ground.

Judicial foreclosures are more complicated and have more steps involved than the non-judicial FCs but, if you know what you're doing, you can streamline the process far better than any large institutional lender can.

Will the builder's risk insurance provider deny coverage if I didn't list my mortgage lender and were to make a claim as some point after taking on the insurance?

Raise money for a Syndication – This is a great beginner’s way for someone that has a network and wants to get involved in the deal.

If it's a roof leak, that's a tough one and there's not likely a quick solution other than getting the city involved or buying the house.