Incentivize them in a way that works for both of you (fee, partnership, whatever).I hope you can find the answers to increase the revenue and reduce the expenses so you can keep all these properties. 

Should me and my partner create a separate LLC with 50/50 partnership or have two separate LLCs?

Don't just look at the numbers and pull the trigger on something.

Double check all your numbers, rental comps, rehab budget ($5k/unit seems very low to me), etc before pulling the trigger. 

The partnership can end after home is sold.

Lets pretend i dont use any of my cash at all...1) seller agrees to an opperating agreement/partnership where he carries the 21,250 to closing then once closed he gets the full purchase price of $85,000. 

Any advice on this type of partnership or any other creative way to handle the property is gladly accepted!

I would recommend touching base with your current mortgage lender(s) to let them know you might be looking at refinancing in the near future so they can be ready to act quickly when you pull the trigger. 

The permits trigger the city inspection.

A transfer to an LLC will trigger the clause and should therefore be avoided, even though banks are hesitant to ever foreclose as long as the note is being paid.