Joe,
I list foreclosure properties for lenders and work with buyers in the Kalamazoo area. The answer to your question is...it depends.
Typically, bank owned homes are priced under market value in our area.
But before the banks put them on the market they are appraised and have a Realtor provide a BPO (broker price opinion).
Based on that information the banks will price the property to sell quickly.
They try to get it right but sometimes they price them very agressively and the property sells immediately. Sometimes they price them too high and they remain unsold for a month or two, at which time the price is usually adjusted.
When the properties have been on the market less than 30 days, there generally is very little negotiation on the price, maybe 5% off list price.
I hope that helps. Contact me if you would like more information.
Joel

Joe- my experience with REO homes is that they price the home just under fair market value and continually reduce until sold. At the time that they are putting it on the market they really don't consider what is owed. What matters at that point is what it is currently worth in this market. They have had an appraisal and at least 2 agents do a Brokers Price Opinion before arriving at the listing price. So, my advice would be to have your buyers agent pull some comparables and see if you agree that this home is listed at fair market value or just below and make an offer based on that. Good luck!