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 the buyer 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 do them themselves.
A growing trend in REO (bank owned) properties is for the addendum returned by 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 heavily run-down areas, it is not uncommon for inspection periods to be 15-20 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’s list and resell the property at a profit. If the only advertising medium that sold REOs was MLS, many would go unsold as the average investor does not have access to MLS and the best buys are REOs that are not sold in 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 realtor.
However, REO brokers and agents may have trouble closing these deals because the investor hired you at too high a price. Now you know because you cannot resell it to another investor who will rehabilitate it or keep it as a rental. Therefore, the investor uses the inspection period to exit the contract and get his money back. This generally infuriates real estate agents as they have to re-market the property again. If this happens too often, the real estate agent will not only lose this listing, but they will also lose the asset manager (bank) as a customer.
There is a trend taking place in REO hiring that gives the buyer a zero-day inspection. This means that as soon as the buyer signs the contract, they can no longer exit using the inspection period as a legal loophole. We are even seeing that the real estate agents’ appendices say zero-day inspection, while the asset managers appendices allow 5 days. Obviously, this is a prime realtor move because the result is detrimental to the final sale price of the property. These investors who are returning the properties do 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 offering, the vast majority of investors do not and these are the end buyers who should be bidding on the properties. Due to this burdensome zero-day inspection requirement, inexperienced investors are paying more money to experienced investors, often for the same properties. This earnings spread could go to the asset managers’ accounts, but they may not even know this anomaly is happening as their only input is the publicly traded 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 demand the higher of 10% or $ 5,000. The net result is that there are fewer bidders willing to buy the properties and more price drops when the properties are finally sold.