Jesse's right about a couple of things, as far as the condition of the house you buy. What FHA does, is be sure that you're buying a house that's worth the price, and that there are no hazardous conditions (do you really want hazardous conditions?). A private investor loaning you money, or a 'hard money' loan, will have somewhat higher interest rates, but maybe will allow some undesirable conditions. There are sometimes work-a-rounds for some of these issues that come up with FHA, but even for conventional loans, because even conventional lenders won't lend money on a house with issues that could compromise value. The smaller direct lenders I work with generally know the appraisers, although an appraiser cannot be hand-chosen like they used to be. I've seen fraudulent appraisals when prices were skyrocketing and anyone could get a loan. An independent investor lending you money might not care, but a reputable lending institution will. It's for their benefit (they lend you money on a house worth the money they're giving you) and your benefit (you get a house of value).
Now, there are other loans with similar low down payments that you could possibly use for different types of bank-owned properties, so we can check those out as we see properties that fit the criteria.
If you plan to expand using licensed contractors so the job is done right (electrical, plumbing, structural soundness, etc.), you'll need a permit for the structural changes. If you buy a house now that has unpermitted improvements, it'll be noticed by city officials when it's time to expand. Converted garages often don't count, because it's not really a living area, and you can often convert it back to a garage. If you don't care about permits, you won't be able to formally add the square footage to your home that would give it a higher value when you go to sell in the future. Having permits assures you that the work is done right, and you get to add the square footage and benefit from the higher value.
It's better to be informed before jumping in. The bottom line is, there are lots of other places to look besides 92116 and Lemon Grove or National City, and if it sounds too good to be true, it probably is.