This study provides an alternative way to produce biodiesel from low quality feedstock oil. Feedstock oil with high water and free fatty acid contents can be hydrolyzed into fatty acids using conventional methods or subcritical water processes. Fatty acids produced can be reacted with methanol to produce fatty acid methyl esters under conditions developed in this work, which is much milder than the supercritical methanol condition and without the use of catalyst. Using palmitic acid and oleic acid as the model free fatty acid, at 175–205 °C, 2.0–2.8 MPa and with a fatty acid:methanol:water ratio of 1:2:0.05 (w/w/w), a conversion of 96.5% can be achieved in 3–4 h. The method can be applied to feedstock with water content up to 15%.