In other words, how to smell and avoid "shark" private lender(s).  

I would like to put this in a 1031 exchange so that I can avoid the CA 40% cap gains.

If both of those things are true than maybe this is still a good purchase, even if it's not a great investment.Otherwise, I think you should avoid negative cash flow.  

That's a matter of long term strategy to avoid ever increasing insurance rates due to hurricane risk factors.  

And should I go ahead and make the purchase agreement with the seller to avoid this?

Let me phrase the question a different way to avoid confusion -  I'd like a mix of SFRs in solid cash flow neighborhoods and some SFRs in good neighborhoods that are in the path of progress.  

And secondly is to avoid using a HML, I am now trying to seek some funding partners (family and/or friends) or private money which should be much cheaper and less of a hassle to deal with. 

In general the fund constructs seem to fit better with the RIA regime and avoidance of BD registration.  

So, what better way to avoid major mistakes or obstacles then by learning from others and taking the right risks.

I'll probably end up going with licensed contractors so I can avoid some risk.Thank's for the advice.