You hire a HUD Certified 203k Consultant to do a "Feasibility Analysis". That consultant can do aninspection prior to your offer and prepare a scope of work with a cost estimate. Your Realtor can use that as a basis to help "justify" your lower offer. You also get the confidence knowing that a professional has looked at the house with you. This inspection usually costs about $350. If you need a referral, please let me know.
Your lender should also prepare a pre-qualificatioon letter, but instead of a letter, request an "automated underwriting approval" for the purchase price PLUS the rehab costs identfied by the consultant. This makes you an infinitely better prepared and better qualified buyer making it more likely the asset manager will accept your lower offer. More details on the FHA program canbe found at http://www.203kServices.com
Are you really the parient one? Only kidding.... the answer to your question is yes. You say you are working with a realtor, have that realtor pull the comps to get an idea of what homes are selling for. You can offer what ever you want to but remember you just might get refused or countered or there might be multiple offers. The bank will want the highest and best. If you find a home you like make it a good offer, notice I said good and be reasonable. Homes have dropped so much in price everything is a good deal
Do you have a buyer's agent who can help you to make a decent strategy with this offer?
I have seen many foreclosures in my market (Birmingham/Bloomfield) go far over asking price. It is hard for any of us to know if the asking price on that home is off or not, and you will want to take other offers into consideration as well. Is it likely a 'hot' property, with more than you interested?
You can make any offer you want, but if you genuinely want the house then you need to make the offer somewhat appealing to the bank. They have already done their appraisals/bpos before they listed it, so they have some sense of what they think it is worth even though they are losing money on it.
I agree with you that prices are on the upswing. Your bank will set the guidelines for your mortgage appraisal and they might not want to go back further than 120 days.