I'm wondering though, if I market them as lease option/rent to own, will a PM show the property, handle paperwork including the option contract and then manage the property or does that require a real estate agent?

What are the legal options of landlords and property managers in this situation?

It might work for your borrowers, however.If it’s ok that you are not the direct lender, but you still want to control the deal and take a cut, there are other options, so you don’t have to say “No” to prospective borrowers:You can originate loans using white paper offered by many larger lenders.

It can be, but they also have an annual fee option which is $499. 

You don't have to, decided to do so, because we felt like that was the safest option and to not carry the liability personally, however, it is not required. 

Check the Chicago laws to see what your  options are as far as saying no. 

That being said I've looked into P2P lending as an option.

Can you seal the space  between the houses. offering to pay half is also an option , not sure he will take it. 

I also have the option of a purchase mortgage with a pledge of the down payment from investments but don’t have to actually put the money down, vs a conventional.

Probably few real estate investment options today pay 7% return, and even if they did it is not risk adjusted.