Typically, a real estate buyer had the seller give them an inspection period in which the buyer will have a professional inspect the property 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 addendum that comes back from the asset manager or real estate agent to have a short inspection period. The usual inspection period for REOs varies depending on the area of the country where the Reo is located. In some badly run down areas, it is not uncommon for there to be inspection periods of 15 to 20 days. 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 buyer list and resell the property at a profit. If the only advertising outlet selling REOs were 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 within the first 30 days on the 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 knows it now because he can’t resell it to another investor who will rehab it or keep it as a rental. Therefore, the investor uses the inspection period to get out of the contract and recover the money from him. This usually infuriates real estate agents as they have to put the property back on the market again. If this happens too often, the real estate agent will not only lose this listing, but may also lose the asset manager (bank) as a client.
There is a trend happening in REO hiring that gives the buyer a zero day inspection. This means that as soon as the buyer signs the contract, he can no longer get away using the inspection period as a legal loophole. We’re even seeing real estate agents’ addendums saying 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 abandon an offer, the vast majority of investors do not and these are the ultimate buyers who should be bidding on the properties. Because of this onerous zero-day inspection requirement, inexperienced investors are paying more money than experienced investors, often for the same properties. This profit differential could be going into the accounts of asset managers, but they may not even know this anomaly is happening, since their only input is the listed 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 range of $500 to $1,000, but some realtors require the greater of 10% or $5,000. The net result is fewer bidders willing to buy the properties and larger price drops when the properties are finally sold.