You should rely on your agents information. If he is the listing agent as well, then there may be a conflict of interest? Who do you really think he is really representing ?
You should get an agent who is only representing you and not the seller. Their is a buyers broker agreement contract that protect your interest.
Reo properties are priced aggressively, so there will be a lot of competition. You need an agent who is on top of new daily inventory.
OBJECTIVE REAL ESTATE
6399 WILSHIRE BLVD SUITE 908
LOS ANGELES, CA, 90048
Well there really isn't any way to verify this information. You agent is telling you what the listing agent has told them. I suppose you could put in that low offer, but its a waste of time if you have no chance of getting the house. I will tell you that most REO homes and Short-Sale homes sell for more then the asking price.
This market requires alot of patience and "go for it" attitude.
I might have still submitted your offer after looking at the comps (was the home really under market?) Some REO lenders won't accept an offer too much over market for fear it won't appraise if the buyer is getting a loan. Some buyers submit offers over asking knowing the property won't appraise and then they "beat" down the price based on the appraisal- doesn't always work, but I have seen it.
Also even though there was a 225K offer, that doesn't tell the whole story, what were the terms? Is it an owner occupied buyer & does this seller give preference to owner occupants? Credits, contingencies, request for repairs can affect the NET to the bank and that is what they care about. Is that buyer going to stay with the offer or did they make offers on multiple properties at the same time and are only going to choose 1? Don't be afraid of competition. Make the best cleanest offer you can, demand is high for good houses in that price range, don't bet on the sellers coming back with a counter, they may not.
The real estate market is now undead. Like Vladimir Dracula, it is clawing its way out of its coffin. You cited a $35,000 overbid as evidence. When the overbid is that high, I suspect that the property may have been underpriced for auction style bidding. On the other hand we are hearing about and seeing bidding wars on market priced listings as well.