The owner (could be several depending on how the mortgage was pieced out) will do an appraisal and / or a Brokers Professional Opinion (BPO) of the property so they are aware of the condition.
Usually we work these problems backwards starting with market value if the home were in great shape. Subtract the cost of renovation (you need to walk through with a reno contractor). Subtract another 10% (at least) for contingencies. Now you have an idea of what a reasonable offer might be.
If there are mold issues this home may not qualify for financing. Are you paying cash? Some of our lenders may offer a construciton loan to fund you though the reno period then change to traditional financing.
The seller pays the sales commission so you shouldn't hesitate to find a realtor that can assist you with purchasing the home.
Also, banks don't want to negotiate anything other than the net sales price and closing date. These properties often move fast so be prepared to do so as well.
Yes, you should always be able to justify your offer. Understand that the lender knows the condition of the property as well and will likely have some estimates of their own. Today almost all REO properties allow for an inspection so that is not an issue. But if the mold is obvious I would address that with the initial offer.
These properties are very popular and it is not uncommon to see multiple offers even if in lesser condition. Just had one of my own that had a total of 6 offers in 5 days and eventually sold for $15,000 over asking price.
And it needed a fair amount of work.
If you make an offer based on condition and current market value you should be fine. That won't be low balling. If you make an offer and can't justify it to the bank they will likely turn you down. They are very good at waiting for the next offer.
Good luck and again, if I can be of assistance let me know.
Steele V. Propp
Home Avenue Real Estate
Make sure you have a search going to notify you as soon as this home comes on the market. Then get in there and look at it, and you'll have a better idea about what needs to be done and how extensive the damage is.