That $1000 could either be refunded to us or credited on the next tax bill which we chose to do the credit. about a month later the lawyer who completed our transaction sends us an email saying the sellers lawyer knows that we ended up getting a tax credit and that it is owed to the sellers, and that they would take legal action if we didn't refund it. basically my question is how does this usually work out, are they entitled only to a prorated amount of it, are they even entitled to any of it?

You may have to get creative...find a duplex in a good area and Airbnb the units or find an SFR with a legal accessory dwelling unit and live in the smaller unit while renting out the main etc. 

But,  the owners have the legal right to the house. 

Has anyone partnered with an owner to flip a house and if so I did you legally structure the deal?

When he's put up adds on FB for roommates, he demands absolutely no drugs, partying, or drama since it is his son's home. 

Throw in syndications and private money and you can see the similarities.The reason I bring this up is because it seems like there is a very thin line between legal and illegal practices sometimes especially when it comes to borrowing money or raising money to invest.

3) Is it easier simply to have both parties (private lender and myself go on the contract)? 

Every other post on BP seems to be about "wholesaling" with little thought of legalities, let alone the damage done to the public. 

I assume that an eviction would speed up the process since I could lay claim to various legal issues.

This part I don't quite understand.