Reposessed properties can be great deals. As Ralph mentioned, EVERYTHING is negotiable. I usually tell a buyer to work backward on the price as compared to a property that is not a repossession to determine its value. Say an reo house is priced at $200,000. Similar homes are selling for $220,000. The reo home needs about $5,000 in carpet, $3,000 in trim, $2,000 in drywall repair, $4000 worth of appliances, and $3,000 worth of miscellaneous repairs. With $17,000 worth of repair, the home is actually costing you $217,000 to buy. And there could be other surprise repairs you haven't planned for! The reo company probably used a guideline like this to come up with the value. The fact that you have to arrange work and deal with hassle is worth something too. If you don't have the stomach to deal with contractors, etc. the overall savings on the reo may not be your best bet. An reo can be a great investment if you are patient and have the money to deal with repairs.
Although many people think an reo company will take anything just to get rid of it, that is not necessarily the case. The reo companies are not in the business to lose more money for their client than they have to. They have a good idea of what that house costs to stay on the market every day it is out there, between the interest on the mortgage, the utilities, etc. At times, an offer that comes in significantly lower than asksing price may not be worth taking. They may feel that the home will sell if they leave it on the market a few more months. If your offer is enough lower that they feel they could continue to market it for a year and that would cost them less, they will probably not take your offer.
Most reo companies will counter whatever offer you put in if they don't feel it is a reasonable amount for the house. Unlike homeowners, they are not emotionally attached to the house, so risk of offending someone at an reo company with a low offer is negligible.
Be sure to have your financing ready when you make your offer. Most reo companies will require a financing letter from your bank before even responding these days. Also be prepared to wait for an answer. Most reo companies tell you a 24-72 hour response time is normal - I have seen more like a week lately in a few cases. Additionally, most reo companies will not make repairs, but you are still entitled to do a home inspection at your expense. Although nothing will typically be fixed by the reo company if found by the home inspector, it is good to know what you are dealing with and make an informed decision.
Discuss all of this with your real estate agent, there are NO stupid questions when it comes to these properties. Often when the owners left, they took some pretty strange things with them (lights, cabinets, flooring, vanities - even furnaces!), so again, an inspection is recommended.