James, you are right - this market IS crazy! Having said that, I would highly encourage you to take the advice given so far by Sylvia, Fred and Phil.
Many buyers listen to the media about how bad the market is... but real estate is local. Not sure where Niceville is, but I would encourage you to get a good buyers agent and do comps to see what the house is worth.
Most sellers right now are in a tight spot, BUT that does not mean they can take a ridiculously lowball offer, they have to pay the mtg off, closing costs and their agent, and hopefully have enough left over to move. How would YOU feel if you got an offer of $300 on your house you knew was worth $400 -$450?
You have to decide a fair market value, couple that with how much you like the house, neighborhood, schools, etc, and make a fair offer so that you and the seller are both happy.
It's about a win-win situation, not a rape-rape scenario. As a buyer, you have many other hurdles to go through after the price negotiation that you will need the sellers help with, so you do not want to insult them with a real lowball offer.
In the long run, you could lose more by having a home inspection issue, you'll need more negotiation on that and if you make the seller upset, how willing are they to help you with that?
Survey, appraisal, and closing. What if paperwork from your lender takes too long to get to closing agent and you need to request a one or two day extension? This happens often, so in the long run, my advice is to get a good agent, offer a fair price and try to keep everyone happy........ you are in stage ONE of the buying game, many other stages to go through still!
Then again, as Phil mentioned: would you care if you lost the deal? do you really want the house? what is most important to you? A home - or feeling like you won the price war?
Only you can answer that question, but please don't put sellers in that position if you aren't truly interested in their house. As a sellers agent for almost 30 yrs, I can't tell you how distressing this is when they think someone loves their home as much as they do, then get an offer that is insulting.
Would you want someone to do that to you? I'm not saying don't try to get a good price, just don't beat someone up over it, because the behinds you kick on your way up the ladder, may very well be the ones you have to kiss on your way back down the ladder.
Be nice, play fair, have fun, but most of all, look for a HOME, and don't make price the most important issue to wage a war upon or depress a seller who thought you might be the one they'd love to see move into their "home". It's an emotional thing.... and I'll guarantee you if you go way too low, you will lose in the long run over the other issues such as home inspection, appraisal, etc. . . . get a GREAT AGENT and follow their advice.