As of today, in our local MLS. there are 12,041 active listings of which 2636 are REO (bank-owned) or 22%, and 2852 are short sales or 24%.
Siince January 1, 2008, 1151 REOs closed, compared to 102 short sales.
Because of the painfully slow process of getting an acceptance, rejection or counteroffer to a short sale offer, I am more inclined to look for REOs for my clients who are interested in such properties. However, seeing that there are more properties that are on the short sale list, I don't want them to miss out on these either. As long as we set expectations that this type of transaction will involve a long waiting period, and that other buyers may submit offers that are better than ours, my clients are fine with continuing to look while they wait.
Along the way, I consulted with the California Associate of Realtors legal department about back up positions, etc. According to her, even if my client is the first accepted offer on a short sale and other offers are in back up positions, the rankings don't matter to the lender. The lender will make the selection and final decision on the best financial outcome for them regardless of whose offer was accepted first.
So the advice when writing an offer on a short sale property is to give it your best shot...unless you want to keep playing the waiting game or risk being out of the game entirely.