The thought of buying Bank Owned Homes is very appealing to many buyers - many like the glamor these foreclosed properties have garnished in the national media, television and the do-it-yourself investment gurus.  Bank owned properties can yeild great opportunity, but there are many pitfalls one must watch out for when hunting them.The primary reason most people look for Bank Owned Homes is that they assume there's instant equity, that cannot be more FALSE (Best said in the tone of Dwight Schrute, from NBC's hit show "The Office").  Many of the listing entities that manage the Bank Owned Properties (REO's) are loss mitigation and asset management divisions looking to liquidate the banks newly acquired properties in the shortest amount of time for the highest amount of money.  Many bank owned properties start out merely under acutal market value and incrementally inch their way down in price as time passes. I'm sure there's a bank formula for the way they handle their price reductions or their terms, but there's no "golden rule" for REO's,  I've seen banks take significantly less for a clean (low or no contingency) CASH offer when up against a more restrictive FHA or Conventionally financed offer.  In many cases, the quicker the asset can move, the better off and the more motivated the bank will be.  On the flip side, some asset managers are not impressed at all with cash (although, it's hard to forget the "Golden Rule of Cash"  -- "He Who Has the Gold, Makes the Rules").Some experts estimate that there are up to seven million bank owned homes that are currently not on the market.  This is an attempt for banks to manipulate the market inventory to help stabilize and firm up the prices on the current inventory being marketed. 

Case in point: a home a client of mine just put a cash offer in on was acquired by trustee deed (at auction) by the bank in mid OCTOBER 2009, the property reached the market the second week of January.  This home sat empty and unmaintained for over a quarter.  There are MILLIONS of homes out there like this.

My advice, do your home work on bank owned properties first.Now the big fallacy aside, some other things one must watch out for:

1. Custom Bank Addendums - Fannie Mae and other Banks all have their own addendums, I call them CYA addendums covering the banks "Bum."  Thes can have serious ramifications on your transaction that will affect your rights in the deal.  These addendums are not part of the standard Washington State purchase and sale agreement and it does modify some of the boiler plate.  If you have concerns or do not understand it it is advisable to get a competant real estate attorney to review.
2. Damage to property - The banks are getting a little better at winterizing homes prior to severe damage but they cannot always get to them in time.  In most cases you'll find bank owned homes to be winterized (water turned off, antifreeze in the pipes and the water heater drained, some cases the power will be off).  It's imperative that the utilities be activated for inspections.  In many cases the banks will refuse to do this for you and the burden to turn on the utilities is placed on the home buyer (keep this in mind when making your offer that there are sometimes increased costs when buying a bank owned home usually under a few hundred bucks).

Now there are probably a million other scenarios and hypotheticals for puchasing bank owned properties, but for the most part these are the top few in my book to watch out for.  Best advice, do your research  make a solid offer and be ready to walk away if you don't get what you want.