Usually a buyer of real estate had the seller give him an inspection period in which the buyer will have the property inspected by a professional to see if there is anything the buyer missed. These inspections are very inexpensive insurance for the buyer and should always be done when buying a personal residence. For investors, the inspections are equally important but often investors do these themselves.
An increasing trend in REO (bank-owned) properties is for the addendum that comes back from the asset manager or the realtor, to have a short inspection period. The usual inspection period for REO varies by the area of the country where the Reo is located. In some very distressed areas, it is not uncommon for 15 – 20 day inspection periods. In active markets, the inspection periods are usually 5 to 10 days.
The inspection period is very important to investors because this allows them to market the property to his buyers list and re-sell the property at a profit. If the only advertising medium that sold REOs was the MLS, many would go unsold as the average investor doesn’t have access to the MLS and the best buys are the REOs that are not sold in the first 30+ days on the market (DOMs). So investors put the properties under contract, provide proof of funds or letter of credit and make a deposit to the closing agent chosen by the asset manager or the realtor.
However, the REO brokers and agents may have trouble closing these deals because the investor put it under contract at too high a price. He now knows this because he can’t resell it to another investor who will rehab or keep it as a rental. Therefore, the investor uses the inspection period to get out of the contract and get his money back. This usually infuriates the realtors as they have to re-market the property all over again. If this happens too often the realtor will not only lose this listing but may lose the asset manager (bank) as a client.
A trend in REO contracting is happening that gives the buyer a zero day inspection. This means that as soon as the buyer signs the contract he can no longer get out by using the inspection period as a legal loophole. We are even seeing the realtors’ addendums say zero day inspection while the asset managers’ addendums allow 5 days. Obviously, this is a realtor lead movement because the outcome is detrimental to the final sale price of the property. These investors who are returning the properties are doing so because the price they paid was too high. The result is the asset manager has to drop his price to attract more buyers.
While a small group of investors are wholesalers who use the inspection period to abandon an offer, the vast majority of investors do not and these are the end-buyers who should be bidding on the properties. Because of this onerous requirement of zero-day inspection, the inexperienced investors are paying more money to the seasoned investors, often for the same properties. This profit differential could be going to the asset managers’ accounts but they may not even know this anomaly is happening as their only input is the listing realtor.
In summary, in an attempt to have fewer failed deals, realtors have tightened the requirement of the inspection period and often the amount of the deposit. Most REO deposits are in the range of $500 to $1,000, but some realtors are requiring the greater of 10% or $5,000. The net result is fewer bidders willing to buy the properties and further price declines when the properties are finally sold.