Are zero-day inspections the killer of REO investing?

Are zero-day inspections the killer of REO investing?

Typically, the buyer of real estate has the seller give them an inspection period where 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 purchasing a private residence. For investors, inspections are equally important, but often investors do them themselves.

A growing trend in REO (bank-owned) properties is for the addition returned by the asset manager or broker to have a short inspection period. The usual inspection period for an REO varies depending on the area of ​​the country where the Reo is located. In some very distressed areas, inspection periods of 15 to 20 days are not unusual. In active markets, check periods are usually 5 to 10 days.

The inspection period is very important for investors because it allows them to sell the property to his list of buyers and resell the property at a profit. If the only advertising medium selling REOs was the MLS, many would go unsold because the average investor does not have access to the MLS and the best buys are REOs that have not sold in the first 30+ days on the market (DOM). So investors put the properties under contract, provide proof of funds or a letter of credit, and make a deposit with the closing agent selected by the asset manager or broker.

However, REO brokers and agents may have trouble closing these deals because the investor has put it into contract at too high a price. Now he knows this because he cannot resell it to another investor who will rehab it or rent it out. Therefore, the investor uses the inspection period to get out of the contract and get his money back. This usually infuriates realtors as they have to remarket the property all over again. If this happens too often, the broker will not only lose that listing, but may also lose the asset manager (bank) as a client.

There is a trend happening in REO negotiation that gives the buyer a zero day inspection. This means that as soon as the buyer signs the contract, they can no longer get out by using the inspection period as a legal loophole. We even see broker addons say zero day verification while asset manager addons allow 5 days. Obviously, this is a leading move by realtors because the result is to the detriment of the final sale price of the property. Those investors who are returning the properties are doing so because the price they paid is 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 back out of an offer, the majority of investors do not and it is the end buyers who must bid on the properties. Because of this onerous zero-day inspection requirement, inexperienced investors pay more money than experienced investors, often for the same properties. This difference in profits may go into the accounts of the asset managers, but they may not even know that this anomaly is happening because their only input is the listing broker.

In summary, in an effort to have fewer failed trades, brokers have tightened the requirement for the verification period and often the deposit amount. Most REO deposits range from $500 to $1,000, but some brokers require the greater of 10% or $5,000. The end result is fewer applicants willing to buy the properties and a further drop in prices when the properties are finally sold.

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