Investigate is the key word here. Try to find out who the engineer is on the wall, why the final was never issued, and the reason for the wall in the first place. Did they run out of money? Was the structure in danger without the retaining wall, or is the wall constructed as to be unsafe? In other words, what connection does the wall have to the stucture itself.
A lender lends on the structure, not necessarily the appurtenances unless they are attached and become a part of the real estate - it is a question of liability, always. Just be prepared to pay the cost directly to the governing entity for the final inspection and clearance for the permits on the wall.
Next step is to run the situation by your lender - based on the information you gathered from the engineer (you may also be able to obtain the plans for a small fee), you may find that the lender has no interest in the wall unless there is liability.
If your lender has no problem with the wall, your next step is to make your offer, AS IS, no contingencies, as clean as you can make it - ask for nothing, and submit your formal approval letter(s) and deposit check copy through your agent. Best advice is to find out what bank has control of the property and go to them for an additional approval letter to submit with the offer, even if you already have an approval letter from the lender you will use. Use a Realtor to submit your offer - banks do not speak to private citizens. Choose an agent that knows a bit about the construction field (they cannot give you advice however unless they hold a contractor' license), but he or she will be able to understand and convey to you exactly what your lender and the bank's answers mean. You will probably receive in return for your offer a clarification that you accept the property as is and they may mention accepting all improvements in as is condition also. But you will have done your homework and know without a doubt the condition of the specific situation that you know you will have to cure. It is never a good idea not to finish a permit process because it will come back to haunt you later, and the best time to cure it is right at the beginning rather than possibly years later when you may want to sell the property.
I hope this helps you a bit. The house itself is probably a good buy at whatever price listed, and you may be able to negotiate down a little bit by not asking the bank to come down too much. Get the information from the agent you choose as to what the bank had to pay to get it back, then look at the loan they had on it. Banks are losing anywhere from $100k - $200k per house in our area (central valley) and I'm sure in the bay area it is much more. Good luck!
Jan

Hi Vprwill-
Erica Pittman-Gaynor with Keller Williams here. I would recommend you talk to a lender about your options. You want to be sure to find someone trustworthy that will tell you the best route for you to go. You should also walk into the County, M-F they have morning walk in hours. I think 7:30-11:30. They can give you info on the specific red tag and who the code compliance officer is in charge of that property. That's the person to talk to.

If you'd like the names and numbers of my favorite lenders I'd be happy to share them with you, just let me know. Hope this is helpful.

Have a great day~

Vprwill, Curt Abramson from Bailey Properties here. There are some loan products out there that will provide rehab financing. Under some conditions, they will provide purchase money as well as the funds needed to address the code violations and/or other repairs. As you can imagine, they are as concerned about risk as you. They will generally be very stringent in their requirements for down payment, your creditworthiness and ability to pay the mortgage. They will also want higher interest on their loan, of course.
Under no circumstances do you want to undertake repairs on property you don't yet own, nor will the current corporate owner allow that, I'd bet.
If you are working with a buyer's agent, they should be able to give you information about the rehab loan options or refer you to a trusted loan professional. If that's not the case, feel free to contact me about that help. My website, listed below, offers you contact information. Good luck to you!