Bank-owned properties typically are not fixed up by the bank before you move in. So, any defects your inspector finds will be on you to fix. Yes, you might be able to negotiate a lower price to offset the repair(s) needed, but you will do the fixing yourself.
Another potential pitfall besides the strong as-is language in REO purchases, is the lack of knowledge the bank has about the condition. You will be relying heavily on your inspector, since the "seller" never lived in the property, knows nothing about its history, and denies every sort of liability for any defects.
A normal seller (e.g. owner) will disclose the defects and history as he knows them. Banks typically are not even required to disclose a thing.
The advantage of REOs is that they must sell at or below market. Often below. A pig in a poke gets a lower price than one with a seller telling you what he knows and being on the hook for hiding defects. Also, cosmetics and even minor repairs are often overvalued by buyers, meaning they think it will cost a lot more than it does to fix something or they won't even consider a property with the wrong colors or wallpaper in it, resulting in lower demand and pricing.
If you're willing to do your homework, can find a reliable inspector and good contractor(s), and you can look past defects to what a property could be after you've spent a known amount of money, you can really win with REOs.
The listing service usually identifies the seller type, but more importantly you should ask your Realtor for all the properties that are priced below market. If the list is too big, then ask her to trim it down by area and sort it by price. It really doesn't matter if the property is REO, short sale, distressed (such as a divorce, estate sale or a seller with 2 mortgages). What matters is your potential equity. Just recognize that REOs have a little more risk of unknown defects than other types of sellers.