It may be months or even years between the time that the borrower stops making payments and the lender initiates the foreclosure process.

That way I only borrow the money for the day of the auction unless I'm successful.If I'm successful I keep the loan out for a few months while I rehab and then either sell or rent/refinance and then I pay back the Line of Credit.

Many do not adequately vet their borrowers.

HOWEVER if you had plenty of money to cover these risks then you likely wouldn't be needed to borrow forward so much of their capital to buy the next unit.

And the bank is still only borrowing at 80% LTV; there's a higher chance now that i get that refi because the amount i'm requesting would probably be closer to that 80% then the appraised value of the house right?.

Here, you would make a loan with your own money and use the note as collateral to borrow additional money.

Definitely get an appraisal if you think the house is only worth $20,000.00If it is correct that you said it's new construction, and almost done I'm sure it worth well over $20,000.00If the houses in the area are going for substantially more Ray Charles can see it a $100,000.00 house or more you don't need to have your borrower pay for an appraisal.

His selling point was a lower interest rate + your money earning while it's in the CD and borrowing against it.

He needs to be added as a co-borrower. 

YOu could say, Hey Rick, can my IRA borrow 40k to do a rehab??