How have others dealt with this issue? 

@Jeb Brilliant I have used the Kwikset many times without an issue.

These issues don't stress me out, I look at them as an opportunity to learn.

There is a foundation issue on one of the inner stem walls. 

I plan on building a relationship with the seller to get more information on the deal such as a list of all the properties, current rent, rent history, status/quality of each home, cap rate etc.My issue is I don't have anywhere near the 20% to 25% down payment, even if I were to negotiate the price down by $1.5 mil.

Talk to your Local building dept, the one that issues these permits.  

The assumption that a leak directly above was causing lumber in the wall to rot seemed reasonable, but even without the leak, I don't think any of us would have expected a foundation issue like this. 

Explain that this is a heath issue and ask code enforcement for assistance.In my city, the zoning people would enter with me and if the tenants didn’t adhere, the sherif would be called to assist with removing them.

I will inquire about the possibility of needing a special permit as I’m not sure if it would cause issues in the neighborhood.

This isn't legal advice, but simply my personal opinion on these issues.