REOs are bought "as is" unless otherwise negotiated. So, unlike a conventional sale, you won't receive an itemized disclosure form from the departing owner that notes the home's known flaws. While banks will usually make basic repairs to bring REOs up to code, that's about it. So hiring a thorough inspector with strong references could be crucial in determining how much you'll have to spend on renovations and what you can afford to offer. A consultation with a remodeling contractor soon after inspection would also be a good idea if you're still serious.
Though you may be trying to save on fees by dealing directly with the bank's own REO specialist, a seasoned REO buyer's agent of your own can help with several aspects of the process, particularly negotiation and neighborhood and market research as well as other due diligence. He or she should also be able to guide you to more viable distressed inventory if your deal falls apart.
To help determine what to offer, you'll want to look at a comparative market analysis, or CMA, that includes only pricing and sales on REOs and short-sale homes within a mile or two that are similar in size and style to the one you want. Your agent, or possibly an agency seeking your business, can provide this data, which should give you a clearer value picture.
In some instances, even 30 percent off market price won't be enough to cover repairs or compensate for a persistently declining area. If there are truly as many foreclosure homes in your area as you say, there may be one or more underlying problems at work such as overbuilding, excess speculation that led to a hard crash, loss of a major employer or employers, high tax rates or high crime rates.
Then again, the many foreclosures in the area may just be starting to sell and those doomsayers you cite could be relying on already obsolete information.
While REO buyers in healthier markets are being rejected by banks outright for lowballing, that likely won't be the case in your community; the bank should at least work with you. By the way, a mortgage company will generally respond to an offer within seven business days and either accept it or counter.
Meanwhile, it would be interesting to find out what that unmet auction reserve price was on your REO, because that information would give you a loose baseline. An agent should be able to obtain this information.
As you can see, there are a few too many questions here to provide an accurate offer. But if pressed to "ballpark" it, I'd say take at least one-third off what you'd otherwise pay for a like-size, good-condition conventional home, particularly given the glut of distressed units.
I hope you strike a great deal. Good luck!