"Just Get it Under Contract" - True of No

[Romeo Jeremiah]

REO property (Fannie Mae) listed for $144k in my area but needs work. Comps come in at this price but are move-in ready. I know this because I recently had an appraisal done on a house, with the same floor plan and in the same subdivision less than 2 weeks ago.

The subject property's "bonus" room over the garage was likely completed without a permit, has water damage stains on the ceiling's sheetrock, has a trip hazard immediately after entering the room (has a 6" blind step") and likely will have to be redone. The room just looks horrible. This is on top of the fact that the house needs the standard clean, paint, carpet, and appliances, and a few replacement windows.

While the ARV may be $144k, the real offer should be $120k or lower based on what I think I need to but into the house. Thing is, the seller's agent countered at $142,900. Yeah, right.

Question is, How would you handle this situation?

Would you still put the house under contract, schedule some appointments with the city inspector and home inspector, and then reduce the asking price to $120k or less AFTER the proof can be sent to the seller? The financial risk would be the price of the home inspector and loss of earnest money? In short, does the phrase "just get it under contract" hold in this situation?

Rent for this property will go for at least $1350 once cleaned.