Are you going to live in the home if your offer is accepted???? or are you looking to flip the property????? If you're going to flip the home, you need to factor a profit into your calculations.
Now you can determine your maximum offer. In most cases you probably want to your initial offer to be less that your max. But not always. Why?? Because sometimes you don't get a second chance to bump it up. Remember, your offer is competing against other offers. So while your waiting for a counter offer and hoping one of your incrementally increased offers will be accepted, ideally below your maximum, someone else's offer may be accepted.
You need to think about how strongly do you want the home.
Your agent will submit your offer for you. Usually in a few days, it varies, it could be more or less, the bank will accept, reject, or counter-offer.
Sometimes the bank will have the broker handling the foreclosure/REO notify all those who have submitted an offer that they (the bank) have received multiply offers. They ask all those who have submitted an offer to submit their highest and best offer which must be received by a designated date and time.
The bank will choose (but they are not obligated) the offer they consider best from their standpoint. For example they may choose $125,000 cash over a $140,000 offer which is comprised of $20,000 cash down payment and $120,000 mortgage.
With many of these properties, the price typically already reflects the condition - so although you might think it "needs a lot of work so I want a lower price" - that discount may already be factored into the list price in the seller's eyes. Additionally, these properties are generally sold "AS-IS" with no disclosures, so they are typically not going to fix or repair anything for you.
As with any home - It's critical to:
1. Make sure your research is done on comparable property values, making adjustments for the condition of the property. If a property is priced 100k below market value, and needs 30K worth of work, it might be a good deal at list price. If it's priced at market value, but needs 30K worth of work - it might not be a good deal. A comparative market analysis that takes into account any condition issues and the cost to repair them - would be a good place to start.
2. Make sure you get a thorough home inspection before committing to the purchase. Many of these properties haven't been maintained, and have been sitting vacant for a long period of time. Also, the previous owner might not have been too "happy" about losing their property to foreclosure - and as a result took the frustration out on the house.
Hope that helps!