Need some answers

1) The racing on track is competitive.  Series rules state car contact is not allowed and it is enforced on the track!  You will get a black flag for car to car contact.  One is an accident two or more is a habit and you could be parked for a period of time.  Most cars you are racing have much different speeds, so a bump and run through a corner or any other contact should never be needed to pass.

2) I have never been asked to show $500 dollar documentation.  The judges have been doing this for a long time and for the most part get classing and penalty laps correct for cars.  If you have a Super cheaty car that is legitimately $500 and you don't want penalty laps: 1) Bring documentation like you are expecting an IRS audit...2) Bring a theme and "bribe" judges to limit penalty laps.

3) Finding an already prepped Lemons legal car can be tricky outside of the forums and a couple of select Facebook groups.  See Citrus Racer Lounge or Unofficial facebook group of the 24 hours of Lemons(TM).   There may be a regional group for the south east that someone could point you to as well

I'm gonna address your fist question by sentence.

This depends a lot on what YOUR definition of "hard, close racing..." is. If you think you'd like use another another car for extra braking into a corner, or to help you make a corner that you're unable to make unassisted then you will be disappointed about the penalties you receive over the weekend. There is hard, close racing that is just that racing, not demolition derby. I have had "fast" (BMW's and Miatas) cars treat me as though they have a right to my spot on the track. Sometimes they bounce off and go agricultural, and sometimes there is minor contact, and once I was taken out of the race. The first two, Meh, it didn't bother me. The last however really sucks. Ask yourself, "Do I want to be responsible for ruining someone's weekend, wasting their money, and time?" If your answer is along the lines of "Eh, it's racing" then you will not be happy in Lemons.

KeiCarMike addressed this, but here's a bit more...The series got started because racing is too expensive for the average enthusiast, and racers were too stuck up to make noobs feel welcome (This is a generalization and is in no way directed at anyone in particular.) Racing a car on a track with the circus is an interesting experience. Racing with people who have barely ever turned their steering wheel above 30 mph is kinda mind boggling. 

While not an indicator of your performance, the odds are against you being truly competitive in your first year of Lemons racing.
Can you pass people? You sure can. Will you get passed by others? Abso-f#¢king-lutely.

Ask yourself, if you heard those words at the event, is your racecraft so poor that you couldn't stand to be on track?
If "YES" pick another series that doesn't care if some asshat destroys another competitor's cars.

Lemons is a great community, friendly (not me, of course, but other's are), helpful (name a series that has competitors willing to help you finish building your entry at the track the day before the race), welcoming, and low stress. We're racers, and some are REAL RACERS™.
REAL RACERS™, mostly, try and avoid contact with other cars. The chance of a negative outcome is too great.

Worry about the theme later bring a safe reliable car to the track and have fun.

The "no contact" thing has been covered, but here's what I'll add: If you're driving people hard into every corner and forcing cars to go three-wide, you're gonna run out of luck and/or talent eventually.

What Lemons teaches fast drivers in fast cars is this: PATIENCE. In all caps.

That means seeing the big picture at all times with this kind of stuff:

* Thinking about where you're probably going to catch traffic and plan ahead so your only option isn't either contact or going off the track.
* Making sure cars you're passing know you're there AND will leave you room. Reading other cars' "body language" is a skill that you have to learn.
* Respecting that every car in the field is running its own race. The drivers and teams are fighting their own issues and racing against other people in other classes (or more likely, racing against their temp and oil pressure gauges). Everyone paid their fees to be there and everyone deserves the same respect on the track.
* Expecting other drivers to make rookie mistakes and do unexpected things. It's not that "leave a car length" is recommended advice, but it does create a little bit of safety buffer in case someone checks up or brakes earlier than you expect.
* Remembering at all times (if you're trying to be competitive) that the biggest blow to your chances to is not being on the track. That means collecting black flags, fixing damage to your car, and adding extra fuel stops because you burn a bunch more gas driving 11/10ths.

Some people learn it faster than others and some never learn it so they go elsewhere. What I will say is that other drivers who have done Lemons first and then gone elsewhere have told me they seem to have better spatial awareness and traffic understanding after running Lemons.

If you want to see the most successful Lemons team of all time handling traffic, here's Pete from Cerveza handling the 228-car field at Thunderhill in 2014 on the way to an overall win*. Like most successful teams in any sport or competition, it's remarkably unremarkable. Things are smooth, the driver takes hardly any chances, and they're clearly thinking through the problem before they arrive there.

YMMV, but if you've not done wheel to wheel stuff on a road racing track AND have an interest in endurance racing, Lemons is really a great, low-pressure place to start.

* You should watch the whole thing, but around 8:00 is a great example: The driver is patient to pass the #200 Audi, then catches the white #33 BMW to the inside, but backs out because he realizes he's in the white BMW's blind spot. He's not certain the other driver sees him and would let him have the inside line through the corner. He checks up, gives up some space because he ends up behind the slow Fairmont, then the red Devil E30 makes what is probably a dicey move inside the #33 BMW.

What you should take away is that you're not racing every car on the track into every corner. It's also clear that the driver has thought pretty long and hard about where on the circuit there's room and where the other drivers' workload is going to be high enough they can't respond to moves other drivers make. These are NOT typically skills you will have in your first 1-5 races. They're things you develop.