Roxy, The first thing is that you must trust your agent. By asking this question, you may have doubts about your choice. If you can not trust your agent, their judgement, experience and advise....you need another agent. If you do trust your choice, let them be your guide and do trust your instincts. I don't think you have a simple answer here and you can not rely on "comps" when buying in this market as the MLS data is inaccurate at best and county recorder's offices are still backlogged and taking months to update sale data. If using true comp data from actual recordings, you will still be utilizing data that is a few months old and not a true picture in a downward trend. If you are buying as your primary residence and plan on staying put for more than 5 years, a small miscalculation wont be cause for too much concern. If this is a investment for you, I would recommend, based on this question alone, that you choose another investment vehicle.
In a neighborhood where few homes are on the market and foreclosure is rare, you may have to pay near asking. If in an area with a high percentage of recent N.O.D. filings and many on market, paying asking price may not be the best price. Again, if this will be your home for many years....choose a home you love and buy at a price your agent, the market, your finances and your gut says is good. REO's typically are set at a price with 5-15% "wiggle room" to allow for closing costs, additional repair items etc. BUT, in some area, there is much competition for homes, even in this market. If you are in one of those areas, the banks price may be the price you have to pay...or even more.