On FHA 203k loans the EMD and other deposited funds (This does not include appraisal, HUD consultant fees for 203 rehab program, and other site inspection, etc) will go against the 3.5% min down payment.The 3.5% on FHA 203k is a bit different than regular 3.5% down FHA programs because its off the entire "project cost."

I would seriously consultant an attorney to get in front if this problem.

These costs include lender fees, appraisals, inspection fees, upfront MIP, taxes, title company fees, HUD consultant fees, building permits, agent fees, survey fees, credit report fee...etcThat's why its SO important to get the seller to contribute towards closing costs or you'll be left with the entire tab.

Good suggestion, Craig.Real estate investing seems to be littered with charlatans who try to entice newbies to buy their books, consulting, services.  

I'd recommend consulting with a local attorney or accountant to discuss the situation and get some solid advice before making a decision.

You can consult an attorney for legal advice on this one or move on to the next deal.

Worked as a management consultant for several years then moved to London to do an MBA.

I remember getting a lecture years ago from a (nepotically promoted) exec at a company we were consulting on. 

Consult with your lender on this as they can give you better direction.

That is why so few are successful at it.There are a few auction services consultants who will do all this research, find the deals, and do the bidding for you.