It looks like they have failed to make payments since April (we have been paying rent on time, auto-withdrawn from bank account).Ideally:  I'd like to have the loan/trustee waive all fees and interest, potentially lower the asking price ($10,000 discount on a $160,000 outstanding balance of a home that would likely appraise for $185,000) and we'd immediately go through the purchase process as is.Do I need to bring the Trustee into the discussion with the owner at the same time to make this deal go through?

If they are interested in terminating the rental contract for $$, there's no issue I can see.A lawyer is your best source of info so call one and pay the $50 for the 5 minutes to be certain if you're going to lose sleep over it.But beyond that, if you are depending on the 3 units rental income to make your payments while you rehab one at a time, then it makes more sense to remove one at a time.  

Plus by adding appreciation to the property you could then consider refinancing to lower your payments, in turn more cash flow - or even sell it. 

People that don't want to take responsibility for the car repo and late credit card payments blame the credit inquiries when you ask them, but the credit report itself tells the full story 100% of the time.

We do have a grant of up to 3% of the purchase price, which helps with financing the down payment.Your income will still have to cover the monthly payment.  

Section 8 gives you stability of payments because it is the Govmt. paying you.

Ok so I have a coworker who's looking to buy a home in the same area I've decided to invest in he's getting a mortgage in his name and asked if I would be willing to put up half the down payment and split the cash flow between the two of us has anyone done this do you have any suggestions any horror stories any success stories.

Residential will look at you and your ability to make payments on the property, I don't know your income vs the debt on these but it's possible that your debt to income ratio would cause a residential lender not to lend to you.

Can they deny my payment and still foreclose?

Your cash flow is going to be based on your mortgage payment.