This was my price point when I was looking for my most recent road bicycle purchase. I thought about going the BD/chicabike route, but decided to buy used instead because that's what everyone kept advising me. I scoured craiglist & eBay religiously for months before I found my gem, which I love, but it takes a fair amount of dedication to really get a fantastic deal. I'm very happy with my result, but there are plenty of pro's and con's.
Pro's to buying used:
-generally more bang for the buck.
-buying "vintage" has a little more uniqueness, history & personality, IMO.
-I don't worry so much about scuffing up my bike, because it's already scuffed. I can just ride & enjoy.
Pro's to buying new:
-It's shiny & pristine, at least for a while. Any scuffs will be YOUR scuffs.
-Perhaps the components will be more "current", but I'm not convinced that means that they are better.
-Purchasing is more convenient. Not as much research is needed.
It took me months to find my bike, but I was being really really picky. If I needed to make a similar purchase in the near future for whatever reason, I could probably find something workable within a week or two. I probably looked at 100's of bikes on eBay & CL before I bought mine. This takes time & energy, which is not something everyone has in surplus. For me I still look at the bikes on eBay, just to see what's out there, because it is educational and interesting. But it does take time.
Out of curiosity, I was just checking the completed auctions for bikes in my size & in this price range. Here's one that might have been fun to bid on. It ended at $112.50 plus $45 shipping. I don't know how much higher the winning bidder would have gone. Maybe add another $50 to win the auction. Then add the price of a new chain/tape/cables/etc, otherwise the bike looks pretty good. Pricewise, you'd pay about the same as the one the OP is talking about.
http://cgi.ebay.com/DIAMONDBACK-ROAD...QQcmdZViewItem