You also want to review a natural hazard report (should be provided by the seller) to ensure that the home isn't currently in danger for being damaged because it is located in a zone prone to natural hazards. I would also go to the City to see if there are any liens or notices out on the property due to failure of a previous owner to maintain or correctly repair the property. Be sure to check the permit history.
Whether or not you go forward depends on what you find, what it will cost to rectify those issues (if remedying them is necessary) and your own financial situation. Your lender might also take issue with this so that might kill the deal as well. Make sure that your lender gives you a determination before your loan and appraisal contingency dates expire.
Remember, one of the bigger issues with REOs is that you cannot get as much information from the owner because the owner is a bank and has never lived in (and maybe never even seen) the property. This makes conducting a full investigation of the property even more important.
You can back out during the inspection contingency for any reason related to your investigations of the property. Be sure to take note of the deadline. Most of the REO contracts say that the property is being sold as is, it usually indicates that they don't want you to ask for them to do repairs. It actually has no bearing on whether or not they will actually give credits, reduce the price (which are also options if you find out there are issues) or do repairs. However, it has no affect of your right to inspect and cancel due to issues that you learn about during the inspection.
If you are using a Realtor agent for this transaction, talk with that person and the responsible broker ASAP. If you are not using a Realtor, contact a lawyer now and as soon as possible about your contract rights and responsibilities.
Harrison K. Long, Explore Group, Coldwell Banker Previews, Irvine, CA.
Once you construct, sign and present the offer to purchase the sellers ( even banks) need to accept by signing. When both you and the seller have signed the initial contract, you will have the number of days specified in the contract for the Inspection Period. Ask your realtor to point this clause out to you and, maybe give you a few extra days if you suspect you will need them.
Be sure to submit your Resolution of Unacceptable Conditions and Inspection Notice prior to the deadline. That is where you will address the findings from the Inspection. You have 3 options when submitting notice: Accept the Property as it is; Reject the property for cause found on inspection and cancel the contract; or Counter. The counter would be the resolution.
You will still be responsible for the cost of the inspection even if you decide not to purchase the property.
You should always get an inspection from a professional inspector with a long track record in the industry, and you should always get a bid from a licensed general contractor that you trust to perform corrective work to all of the items noted on the inspection report. Just because there was a large claim doesn't necessarily mean that the house is a bad purchase. The work may have been completed perfectly - it also may have been done poorly, its up to the inspector to let you know. After you add up the cost of repairs and the cost of the home, you have to decide if thats the best deal for you, or if you could reasonably find another house for less (of similar quality). I can also help you try to negotiate a price credit or reduction from the seller.
And yes, you can cancel under your inspection period, even though the house is "as-is." As-is means the seller won't do any work, and that the seller isn't responsible after the close of escrow.
If you have any other questions, please do not hesitate to contact me.