Typically, a real estate buyer had the seller give them an inspection period where the buyer will have the property inspected by a professional to see if there is anything they missed. These inspections are very inexpensive insurance for the buyer and should always be done when purchasing a personal residence. For investors, inspections are just as important, but investors often carry them out themselves.
A growing trend in REO (bank owned) properties is for the appendix that comes back from the asset manager or realtor to have a short inspection period. The usual inspection period for REOs varies depending on the area of the country where the Inmate is located. In some very deteriorated areas, inspection periods of 15 to 20 days are not uncommon. In active markets, inspection periods are typically 5-10 days.
The inspection period is very important to investors because it allows them to market the property to their list of buyers and resell the property at a profit. If the only advertising medium selling REOs was MLS, many would not sell as the average investor does not have access to MLS and the best buys are REOs that do not sell in their first 30 days on market (DOM). ). Investors then 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 real estate agent.
However, REO brokers and agents may have trouble closing these deals because the investor hired you at too high a price. He now knows it because he can’t resell it to another investor to rehab it or keep it for rent. Therefore, the investor uses the inspection period to get out of the contract and recover the money from it. This usually infuriates estate agents as they have to re-market the property again. If this happens too often, not only will the real estate agent lose this listing, but they may also lose the asset manager (bank) as a client.
There is a trend happening in REO contracting 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 using the inspection period as a legal loophole. We’re even seeing real estate agent addendums that say zero-day inspection, while asset manager addendums allow 5 days. Obviously, this is a move led by real estate agents because the result is detrimental to the final sale price of the property. These investors who are returning properties are doing so because the price they paid was too high. The result is that the asset manager has to lower its price to attract more buyers.
While a small group of investors are wholesalers who use the inspection period to drop an offer, the vast majority of investors do not and these are the final buyers who should be bidding on properties. Because of this onerous zero-day inspection requirement, inexperienced investors are paying experienced investors more money, often for the same properties. This profit spread could be going into the accounts of asset managers, but they may not even know this anomaly is happening as their only input is the listing real estate agent.
In short, in an attempt to have fewer failed deals, real estate agents have tightened the inspection period requirement and often the deposit amount. Most REO deposits are in the $500 to $1,000 range, but some real estate agents require the higher of 10% or $5,000. The net result is fewer bidders willing to buy the properties and further price drops when the properties are finally sold.