This is my first experience dealing with a non-paying tenant and I wonder what strategy I should pursue.1.  

I saw that what they do works, but I don't believe I have enough cash at the moment for their strategy.

Depends on your strategy and ultimate goal.

Unless, you plan correctly with a exit strategy that would allow you to convert with zoning each unit into a condo and thereby selling them one off at condo FMV.

Dan Pezzano Continue to dive into the knowledge base here, but I'd caution you to hone in on a specific niche, to avoid working on 5 different strategies at once.

Even if you went from that to talking to the listing agent to "work this out," it would at best have been a "verbal contract," and a "verbal contract" does not exist in real estate (see above), in practice, meaning that literally the most that could possibly have been accomplished was absolutely nothing.2.

Where would i lose money utilizing a strategy like this?

It is slightly different is this is a buy strategy vs. sell. 

(For example, the dishwasher broke and the landlord literally told us 'you guys buy and replace it and I'll reimburse you' so I got a cheap one on craigslist for 25$...) and that's why @Onna-lisa Kyom is correct that maybe they would sell it for less because it needs so much work.

Should I borrow from my 401K to do my rehab doing the  BRRRR strategy.