I saw a house today at a very good price, but it needs a lot of elbow grease put into it. The guy showing it to us said that a 3rd party (him I guess) bought it after the bank repossessed it to pay off the loan and resell it. He said that if they can't get the money back out of it.. the 3rd party business can file the money lost and get it back through the insurance company.

Is this true? I've never heard of this happening before.

Never heard of this happening. He could have been the buyer or be working for the buyer to show the property. Maybe the third party is some type of investment trust, but still have never heard of receiving "lost" money from an insurance company (unless they are planning to burn the place down!).

If you enter into a purchase contract, have the home inspected thoroughly by a well-recommended inspector. I smell something fishy.

These are investment companies. Sounds like a scam to me. I've never heard of an insurance company paying for something because someone made a poor business decision.