I'm starting to think the home purchasing process/timeline is a little backwards, especially for as-is properties.
Best I can tell about the current process, buyer throws out an offer, seller counters, they go back and forth, and agree upon some sale terms. Then the buyer does their "inspection" of the property. In a normal situation (where the seller was the one that actually lived at the property), the buyers can then ask the seller to fix things or get some $$ for repairs based on the result of the inspection.
For distressed as-is properties, such as REOs or short sales, it seems this inspection is purely informational because the price has already been negotiated. At least with REOs, there is no disclosure, so a thorough buyer investigation is particularly important and can uncover some serious deficiencies.
I liken this process to purchasing one of those goody grab bags when you were a kid, it looks nice from the outside, and you can make some guesses as to its value and contents based on weight and sound, but won't know the true value of the contents till you open it up (after purchasing it). I never bought those bags, because I didn't want to spend my hard earned chore money on something of questionable value to me.
If you are serious about an REO or a Short-Sale, I would strongly suggest you do a thorough inspection prior to agreeing on a price, since you may need to reduce your offer price based on your findings. Or, worst case, you may decide to walk since it needs more repairs than you are willing to put in.
While this may sound expensive (luckily we have a very knowledgeable family member) it could save you a lot of $$ (and potential marital distress =) in the long run.
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Actually, banks (REO owners) are still required to disclose under the common law, facts known to them that might materially effect (affect?) the value. So your strategy is excellent in that I think you should do your best to discover all of the defects you can before you submit an offer, and attach that list of defects to the offer that you make. It serves two purposes: First, it helps support the price you have offered and second, now that the bank is informed of the defects, it has a legal duty to disclose them to future offerors. Of course, I think most banks are simply going to ignore the common law disclosure requirement, but that just means more work for lawyers, mediators and arbitrators, later. Of course, the expensive home inspections and tests should wait until you have a contract, but again, if they are negative and require a renegotiation of the price, be sure to provide a copy to the lender. Just my $.02 worth.
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