What exactly is a REO house?

[Joshua D.]

Hey guys!

So here's the deal. I noticed a house recently in a good area that was vacant and had been so for quite some time. I found out the owner was some kind of bank/government financing agency, and that the house was a REO. Supposedly, it went into foreclosure, then went through a sheriff's sale, and now is being sold by this agency. I reached out them (took me a week of phone calls to find the right person!) and finally got ahold of the right one. We scheduled a visit to the house, and decided we wanted to put an offer in on it. We went in with an all cash offer of $35,200 and, to our delight, the offer was accepted.

It is a 3bed/2.5 bath with a partially finished basement. Probably would sell for around $120,000 if flipped right. This property is in a B area, around $1,200/month including a few utilities. It sold in 2007 for $99,000. In 2004, for $38,000.   It needs some work but it's mostly cosmetic, figuring on the high end around $15,000 in work, max. 

I have never purchased a REO property before this. It states that the agency purchased the home for $984, how is this possible? Can someone shed some light on REO properties and how this could be? Seems to be a slam dunk, hoping I'm not missing some vital piece of info here.