For properties that are listed for auction and have no appraised value, these are tax lien auctions. 

how did the lender find out.. was it disclosed by the title company since no survey was done or did the appraiser note it.. and without a survey how do we know its actually encroaching.

She put $40K into the home and it just appraised in September for $285K just outside of Indianapolis.

The reports are 40-90 pages long and go through the entire house in great detail.Get an appraisal.

Does it need enough work that it will not pass a conventional mortgage appraisal, thereby limiting yourself to cash buyers?

They will generate a report to you based on their findings.Type 2 - conducted by an engineering firm where they will have you complete a questionnaire.The questionnaire will ask you details regarding the house and therefore, I would recommend having a home inspection or appraisal at the time of completion.The above two studies have pros / cons and differences in cost and turnaround time.Best of luck.

The house will still need to appraise for the amount of the loan if you offer a higher price in exchange for repair money from the seller.

Depends on really what you are looking for:-Speed - some HMLS can go "no appraisal" so can close very quickly and beat cash offers if you are in a competitive market to buy-Interest Rates - can range anywhere from around 8% to 13% (same with "points") but not usually as huge of a concern for flippers since the terms are so short-Leverage - depending on your risk appetite / capital - this is also a top concern for some (almost always over and above rates/fees) can see anywhere from around 80% LTC to even mid 90s LTC (including 100% of rehab budget)

I can figure out ARV without an appraisal easily.   

I would focus on "Ugly inventory" but would pass an appraisal and not be "Subject to" so that I can renovate and refinance on the ARV in as little as 6 months to pull out my initial capital and enough to put down on the next REI.On the flip side Indiana and Ohio would also offer a sale price to cash flow ratio since you can still find a great deal in both states.