I would get the hell outta the entire mess..

Him even mentioning that he wanting to sleep in her bed? ( ack ack ack) Yeah when your 5... sleep with your parent, I am assuming hes a legal adult? That is just plain creepy.

Why did she move in with you to begin with ?

I would cut and run, sorry .. I just can't imagine staying in a situation that is prompting all your red alerts to go off the chart.