I hope I'm wrong, but is it a sort of gauze-like substance with a cracking residue underneath that's both stapled and glued to the floor?

No, you might be a tiny whiny naive though BUT that is FINE and that is why gathering some humility on your success journey and forcing your brain to listen sometimes will help you a ton. 

Look for wall cracks especially someone that may not have been patched like a closet.

Radon mitigation was one, install bathroom fan, re-grade around house, repair cracks in driveway, etc.I feel like since there was so much competition for this one I have a significant amount more leverage.

There was an unexpected obstacle in the foundation work and some weather issues which caused some warranted delays, but the rest were due to the contractor's constant missing of deadlines set, their disregard of this project in that it's probably a tiny one compared to the others they're working on, and the back and forth with they city to revise plans and inspections.

Water leaks aren't really related, but if the damage occurs in an area that was earthquake damaged already (separated pipes, cracked drywall, etc) you could kill two birds with one stone.

In fact I notice in the newer built homes in my area that the entry floor living area is tiny (forget about family room) and most of the living space is upstairs in the bedrooms so I would assume that families are content to congregate in the kitchen as opposed to a large living room.

My buddys said is a contractor and he said he would live in the shed if I remodeled it into a tiny home up to code.

Did you do a search for your neighborhood for any Air BnB listings to see if anyone slipped through the cracks and find out how?

In certain cases some investors may allow you to take a crack at managing the project.