The water should not be "hot" coming out of the heater. It should be a few degrees warmer, but not hot.
Check the internal bypass by looking into the inlet or the hole where the thermal regulator goes.
JamesW wins the prize... I looked into the thermal regulator hole but this time the head of my thermal regulator fell off of the spring and dropped down by the outlet pipe. Thus, I opened that to retrieve it and, surprise, surprise, I found not only the thermal regulator but the broken clip from the manual bypass. Thus, now confirmed that I need to replace that part.
Now, the question is whether that job is too much for me to handle. I am pretty handy but I watched the video that ajw22 posted above and this job looks like a 4 to 5 hour job with significant risk or really messing something up when either prying open the internal pieces / parts or when reinstalling all this and hoping there are no leaks.
I'd be curious if y'all would recommend that I take a shot at this myself or whether I should hire a pro for it. Any idea what that costs?? Is it a $150 job or $500 job?? Any and all thoughts are appreciated as they always are by me!! Y'all rock!!