When you buy an REO you are getting the property at a discount and as such, you also are expected and in some cases required to take on additional expenses that you normally would not have to. 

If these properties will be used for some sort of charity I will give you a discount.

She had many updates done to the property over the past 5 years  (kitchen, bathroom, floors, wrap around porch, etc.) and has built up some equity in the home.  

Remember cash is King and Owner financing is better.Understand creative financing, always ask for owner financing, possession, subornation, substitution of collateral, delayed settlement and discounts for early pay off.Offer less - guarantee your equity profit - some say, "If you are not embarrassed with your offer, you are offering too much!"

Also, tile in bathroom/kitchen. 

IE number of bedrooms, bathrooms, lot size etc.You never know who's looking to buy.

Does that include bathrooms/office?  

Students will generally treat their rooms and private bathrooms well, but the common areas get destroyed.

Do you think it is lack of inventory or lack of reality of buyers thinking they are going to get giant discounts or equity whether they are purchasing a foreclosure and have to fix it up or buy from an owner occupant?  

I didn't pay points/discount fees.