Dan/Kathy, its really best to speak with the listing agent to determine how "healthy" the current deal is. REO typically do not like to make repairs, this and other potential issues could cause this deal to "blow-up." Really tough to tell from my "blind" perspective.
Yes you can however recommend keep looking. If a home in escrow all ready has an executed agreement between bank and buyer both parties are honoring the contract terms and conditions. You offer would be a back up kept in file IF other buyer does not close