A appraisal is done to determine if the value of the property is in alignment with the loan you are trying to get - A FHA "appraisal" is to make sure the potential home owner is moving into a solid home
Have a contractor look at it (unless you plane on doing the work yourself) and determine how much it will cost to bring the home to code and then to bring it to neighborhood standards and subtract that from the average market value in the area and that is what you should offer - if someone is willing to pay more let them! If you don't have more than 20k to fix the home move on to the next! If you are a strong enough buyer/ investor to fix a home like that then you probably will be a strong enough buyer to get a loan for the home! If you are going FHA - that is just a waste of time.