Yeah, when I bought my house in '93 (2-family in a desireable area of Boston), it was listed at $180k. I hired a fancy RE lawyer complete with monogrammed shirt to deal with the negotiations (more than worth his $2k fee) who got them down to $133k after inspection. "Comps" were running $220-$240k. One wall was literally peeling away from the rest of the house.. you could stand in the second-floor LR and look down at the sidewalk outside from the 3" crack where the ext. wall and the floor were supposed to meet!*
Charles is right:
the average person greatly overestimates the cost to repair issues in a home
Actual cost to re-build about half the foundation and haul the wall back into place about $12k. Big new two-story deck $16k (to replace dangerously rotting old one; coulda been half that with cheaper materials and a more traditional, smaller design). New garage doors $1-2k.
I could have stopped there, but, flush with my "good fortune", I blew the rest of the difference on a swanky new kitchen, new baths, new plumbing, new electrical, architect, moving walls and doors, refinishing floors, painting, etc. ..young and foolish, I guess..but I did love the K&B and miss them to this day. Anyway, upshot was that I got exactly the house I wanted, spending less than I would have for a normal "non-fixed-up" property. All because nobody else could get over the sickening feeling of seeing the street below peeking up through the LR floor.
Even 10 years afterward, there weren't really any similar houses that were as nicely fixed-up so mine sold in a week. Moral: if you're a seller, it's worth fixing up, at least cosmetically and to keep in line w/other market properties (go to some open houses in your area). And, if you're a buyer, it's worth fixing up as well, IF you have a competent inspection, good negotiating skills, and good luck. I think the reason most buyers don't is probably time constraints. 2 people working w/2 kids would not have taken on my poor, broken house. I was renting down the street and worked from home, so I had the flexibility to run over if there was an issue. Also, it's probably easier to finance a higher mortgage off the bat than deal with a mortgage and then coming up with cash or loans for repairs.
As tryan says, absolutely do the paint and get carpets cleaned unless they are ragged, in which case, replace. Some degree of staging is important, as is de-cluttering. The sad thing about selling my house was how great it looked while we were showing it (all spic & span!.. not its usual state, unfortunately).
-in the fixer-upper camp