When purchasing a SS you should be willing to pay for some upfront items BEFORE you enter into the contract. A full and complete inspection should be made with a complete list of all repairs required. Then you need to get contractors involved. Have them again inspect the home and list required repairs (they may find more than an inspector did). They need to give FULL bids of all KNOWN required work, and if they believe that change orders will be made they can include that expected amount in their bids as a separate item from their past experience. If there is a septic system you need to have that inspected as well, and I mean a FULL pump and FULL inspection, not just a pump and look. If you are NOT on city water then have the water system tested fully as well, for condition of the equipment, rate and flow as well as quality. Anything item that will need replaced within 3-7 years needs to be listed and included in repair...anything longer than 7 years you can't include....and the bank will probably want to line out items 3 years and longer.
Take the full market value at current prices. Deduct your cost of inspections, and cost of any bids and repairs, then deduct the amount of the bids themselves. Be sure and include everything from carpet to paint...if it is in bad shape and does not meet standards for Section 8 housing ..the bank can not argue, it must be repaired! The roof included! Deduct an additional 25%-50% of the bids for repairs (depending on how much work is needed, the more work needed the higher the contingency). Remember to deduct any interest, taxes and insurance for the time the property is in rehab. If contractors tell you it will take 8 weeks, allow 12 weeks. At the end of this process you should actually have CREATED EQUITY, not just made a market purchase. You should have value for your work..and time. Make sure to include a fair value for that in the additional 25-50% I mentioned. You will be spending time, believe me! Your time as project manager should be at least 25 per hour...if you are a professional at it then more like 60-90 per hour! You have the right to include your expected equity when through with rehab.
You can get three bids for each trade and average them, if you can't get three bids then instead VERIFY the contractor by his reputation and include the information that his background and ability proves him to be the best choice. If you have more than one bid, and a lower bid is too low or missing something throw it out. There is no such thing as a deal that looks too good to be true. It usually is just that.
All of this means that you should be talking to contractors and becoming familiar with them. Let them know that you are looking at purchasing SS rehab and will be wanting to use them (whether you plan to do the work yourself or not doesn't matter, however if you are getting a construction/purchase loan a contractor will be required!)
In the contract for purchase include addenda with all this information, the costs of rehab and contingencies etc. Include your expected equity for performing the rehab. Let the bank see it all. Be sure and provide a copy of the inspection reports and contractors reports to the seller and the bank. This is FULL disclosure to them. You can even notify them (most states require disclosure of KNOWN deficiencies) that they have now been informed of deficiencies and must disclose them to any future purchaser. This limits the value of the property to any purchaser in the future and all make the seller and the bank want to dispose of the property even faster! Remember these documents are professional inspections and reports...and prove the deficiencies..they must be disclosed to any seller once known. Make sure you include the current owner's name as well as your name on all reports and documents!
If the bank does not want to allow you to gain equity for your work, then you can just tell the bank that you will not work for free to resolve the bank's upside down mortgage. Tell them you expect to be recompensed for the RISK and TIME that you are taking. Very simple. There are websites that can explain how to value the risk..you can use their information as well.
Keep RECORDS of all contact, phone calls etc. Make sure your RE agent does the same. EVERYTHING said by the bank and seller, contractor, your agent, the seller agent. every detail! Make sure you have a paper trail to every detail and are copied with every detail from every player...in your email if possible. I have forced a sale by a bank before because they made statements that were properly noted in a timely fashion in a log book. Also, it can be helpful to know the STATE laws regarding banks owning properties. Some states do not allow banks to retain property at all, they must instead dispose of it forthwith. This gives you advantage to begin with. If they foreclose they have to dispose as instantly as possible. I believe TX is one of them.