I have purchased a 20yr old cape house in Connecticut that has single zone central air and heat supplied by a Rheem ROHB-095A oil furnace and Rheem RACC-042JAS (1988) air conditioner unit. The house is 2300sq ft and I'm converting the attached over garage area into a bedroom which will add +/-620 sq ft.
I am looking for new systems and have received 4 qoutes from HVAC professionals in the area. The general feeling is I need a 12 SEER 3 1/2 American Standard Allegiance 14 AC and Thermo-pride OL11-105 oil burner.

Three of the quotes recommended that I set up the bedroom seperately because of the space/heating difference and convert the existing ductwork to 2 zones for the rest of the house. The new bedroom and a sunroom would be heated by baseboard and the bedroom cooled by a ductless Samsung unit. This is the way I am leaning even though a HVAC needs computer program showed the ductwork could be expanded into the bedroom and should be able to handle the demand.

My questions:
A. I currently have a propane water heater that is illegally vented into the same chimney as the furnace.I would like to change this to a oil fired unit to supply heating and domestic use water. Is there a unit that would provide the heating for the water as well as the house hot air that I won't have to sell the house to pay for. Excuse my ignorance, but it seems to me I should be able to heat the water and divert that heat to warming the house when needed??
B. I have been offered a 5 year old Burnham RS109 tank less water heater by my plumber to replace the the gas unit. Is there any benefit to tankless as opposed to say a Bock 32 gallon water heater? I have had a similar Burnham unit before and was very happy with it's speed at producing hot water.
C. What haven't I thought of??????
Thanks in advance for your help!