Are Zero-Day Inspections Deal Killers in REO Investing?
Usually a buyer of real estate had the seller give him an inspection period in which the buyer will have the character inspected by a specialized 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) similarities 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 character to his buyers list and re-sell the character 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 similarities under contract, provide proof of funds or letter of credit and make a place 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. consequently, 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 character 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 method 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 already seeing the realtors’ addendums say zero day inspection while the asset managers’ addendums allow 5 days. clearly, this is a realtor rule movement because the outcome is detrimental to the final sale price of the character. These investors who are returning the similarities are doing so because the price they paid was too high. The consequence 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 great majority of investors do not and these are the end-buyers who should be bidding on the similarities. Because of this onerous requirement of zero-day inspection, the inexperienced investors are paying more money to the seasoned investors, often for the same similarities. This profit differential could be going to the asset managers’ accounts but they may not already 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 place. 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 consequence is fewer bidders willing to buy the similarities and further price declines when the similarities are finally sold.