There are many declined properties on the market everywhere due to the real estate market crash. There are many good deals. These properties are being listed at low market value or what is called in real estate terms bottom of the market and some are even listed below market value.
When you put an offer on a short sale the price is not final. The price is a list price set by the listing agent and the seller subject to the seller's lender's approval. All offers are subject to bank approval of all terms and conditions including the list price. Many times the approval from the bank comes back higher than the offer that was submitted to the bank.
REO bank owned property listings are past the foreclosure process. The prices has already been approved by the bank. The list prices are final and also still negotiable. You don't have to wait for the approval from the bank to open escrow on an REO. If you are not a patient person you might want to buy an REO instead so you do not have to wait for the approval from the bank.
So what is the answer to which type of property is better to buy? Both REO and short sales are both priced to sell. Most banks just want the minimum or low market value because they want to get the property sold fast. It depends mostly on how patient you are. The bank does a BPO also called a broker price opinion it is a cheap appraisal done by a real estate broker or agent. They use this information to decide on a sales price. Banks price these pre-foreclosure and REO bank owned properties at low market value.
Homes in all areas have a value range. A typical home owner prices his home at the top of this value range. The banks price their properties at the bottom of this value range most of the time so they are good deals. So, if you are willing to wait for an approval for 60-90 days or more go ahead and buy a short sale. If you cannot wait, then buy a bank owned home. I like bank owned properties myself. I don't like to wait for the approval.
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