If the AC is not working you will need an HVAC company to come out and tell if it's fixable or needs to be replaced.To be honest, everything you are saying indicates you are going to create a money pit for yourself.

Nothing, so I post on her FB biz page asking if she's just stealing my money.

Why not buy it with private money, borrow enough for the purchase/repairs/carrying costs, and then refinance once the repairs are done?

Hard money with 20% down How did you add value to the deal?

I am wanting to sell all my stocks and just take the cash since I don't want to drain the majority of my savings/checking purchasing real estate and have most of my money in stocks.

If they had taken option 1 would they have received more money? 

The other option is hard money, how good of an idea is using hard money for my first deal?

@Simone Montague-Jackson agree with @Charles Carillo and @Jordan Moorhead, that they aren't what the marketing hype claims.Insurance companies are in business to make money, which requires them to have a hard stance on claims and incentivizes them to deny as many claims as possible.In our opinion and 24 years of observations, it worse with warranty insurance products!

It depends if you have a lien on title already (a mortgage or hard money loan), but I would either do this as a hard money refinance or a DSCR cash-out refinance to pay for the reno. 

AVR was good and we pulled 90% of our money out at refi time.