Option A - Incorrect"a tiny beach town approximately 75 miles north of the city of Los Angeles, which sits in a neighborhood" -- here "which" seems to refer to "the city of Los Angeles".
Even if you consider "which" to refer to the entire noun phrase "a tiny beach town ...", this does not make sense.
"the house" sits in a neighborhood, not the "tiny beach town" itself.
"which sits in a neighborhood" -- does not make sense. All houses presumably sit in a neighborhood. It would have more sense if the option described "the kind of neighborhood".
Option B - Incorrect"Located in Carpinteria, California, a tiny beach town that sits approximately 75 miles north of the city of Los Angeles, the house, which is just a few short blocks from the ocean and sits in a neighborhood that overlooks the mountains"
Not a complete sentence.
the structure is this -- "Modifier 1, Modifier 2, Subject, Modifier 3".
Note that Modifier 1 = "Located in Carpinteria, California" refers to the subject = "the house".
Modifier 2 = "a tiny beach town that sits approximately 75 miles north of the city of Los Angeles" describes Modifier 1.
Modifier 3 = "which is just a few short blocks from the ocean and sits in a neighborhood that overlooks the mountains" again describes the subject.
No main verb or predicate.
Option C - IncorrectSame error as B. Not a complete sentence.
In addition -- "neighborhood which is also overlooking the mountains"; note that "which" must be separated by commas.
"is also overlooking" (present continuous) is not appropriate for describing general truths. Use simple present instead.
Option D - Incorrect"a tiny beach town just a few short blocks from the ocean and overlooked the mountains" illogically refers to "Los Angeles".
"overlooked the mountains" illogically states that this town NO LONGER OVERLOOKS the mountains.
Option E - Correct AnswerLocated in Carpinteria, California
[= MODIFIER 1], a tiny beach town that sits approximately 75 miles north of the city of Los Angeles and overlooks the mountains
[MODIFIER 2], the house is just a few short blocks from the ocean
[MAIN CLAUSE]MODIFIER 1 refers to the subject of the MAIN CLAUSE -- "the house"
MODIFIER 2 refers to "Carpinteria, California" in MODIFIER 1.
hope this helps