Point to ponder
This problem forces you to examine the sentence's many modifiers to determine provides a logical description.

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 " sits in the neighborhood not the "tiny beach town" itself_ "which sits in the 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
Not a complete sentence. The structure is this "Modifier 1, Modifier 2, Subject, Modifier 3"
Note that the 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 the 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:- INCORRECT
Same error as B. Not a complete sentence.
In addition -- "neighborhood which is also overlooking the mountains"
note that "which" must be separated with commas
"_is overlooking " ( present continuous) is not not appropriate for describing general truths. Use simple present instead.

Option D:- INCORRECT
"overlooked the mountain"
illogically states that this town NO LONGER OVERLOOKS the mountains. Sounds pretty unacceptable.

Option E:- CORRECT
Located in Carpenteria, California [=MODIFIER 1]
a tiny beach town sits approximately 75 miles north of the city of Los Angeles and overlooks the mountain.
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 "Carpenteria, California" in MODIFIER 1_.