"REO" stands for Real Estate Owned. These are homes which have gone through foreclosure and are currently owned by the bank or mortgage company. This differs from a property up for foreclosure auction. 
If you buy a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees amassed during the foreclosure process. The buyer must also be ready to pay with cash in hand. And on top of all that, you'll get the property entirely as is. That might include existing liens and even current occupants that need to be expelled.
A bank-owned property, by contrast, is a much cleaner and attractive option. The REO property didn't find a buyer during foreclosure auction. Now the lender owns it. The bank will attend to the elimination of tax liens, evict occupants if needed and generally plan for the issuance of a title insurance policy to the buyer at closing.
Note that REOs may be exempt from standard disclosure requirements. For example, in North Carolina, it is optional for foreclosures to have a Property Disclosure Statement, a document that ordinarily requires sellers to make known any defects of which they are aware. By hiring Murney Associates, Realtors, Licensed In Missouri, you can rest assured knowing all parties are fulfilling Missouri state disclosure requirements.
Am I assured a low price when purchasing an REO property?
It's commonly believed that any foreclosure must be a good deal and a chance for guaranteed profit. This isn't necessarily the case. You have to be prudent about buying a repossession if your intent is profit from the sale. While it's true that the bank is often eager to sell it promptly, they are also looking to get as much as they can for it.
Look carefully at the listing and sales prices of competing properties in the neighborhood when considering the purchase of an REO. And factor in any repairs or remodeling necessary to prepare the house for resale or moving in. It is possible to find REOs with money-making potential, and many people do very well buying foreclosures. However there are also many REOs that are not good buys and may lose money.
Time to make an offer?
Most lenders have a department dedicated to REO that you'll work with when buying REO property from them. Typically the REO department will use a listing agent to get their REO properties listed on the local MLS.
Prior to making your offer, you'll want to contact either the listing agent or REO department at the bank and find out as much as you can about what they know concerning the condition of the property and what their process is for accepting offers. Since banks typically sell REO properties "as is", you may want to include an inspection contingency in your offer that gives you time to check for unseen damage and cancel the offer if you find it. If, as a buyer, you can provide documentation showing your ability to pay, such as a pre-approval letter from a lender, your offer will be more attractive and likely be accepted. (This holds for any real estate offer.)
After you've submitted your offer, it's customary for the bank to make a counter offer. At this point it will be your choice whether to accept their counter, or make another counter offer. Be aware, you'll be working with a process that usually involves a group of people at the bank, and they don't work evenings or weekends. It's typical for there to be days or even weeks of going back and forth.
