Great question Geoff. We're seeing a great deal of concern about these REO addenda, and for good reason because as you read them you realize that you don't have the same buyer protections that the typical NWMLS contracts provide.
In general, they are a cost of doing business with a bank/REO. Think of the risk these addenda present as the counterbalance to the reward of the lower price you're paying for the property.
I would recommend against trying to negotiate these terms with the bank, especially if the property is a great value and/or you really want it. The rep for the bank generally wants "easy" more than they want $$.
Best advice - read the entire REO addendum carefully to fully understand the risks so you can balance it against the reward.
In my opinion, the cancellation clause isn't the real risk since it's rare. Look out for:
* De-Winterization Costs - are they going charge you for turning utilities on/off for the inspection?
* Delay in Closing - they typically have near punitive daily charges for closing late due to Buyer. You want to be sure that your lender is well aware of this before they agree to the closing date.
* Closing Date - depending on the bank, this can get tough since many have 30-45 closing dates from 'verbal' acceptance, however many buyers don't want to spend money on appraisals/inspection until they have written/official/binding acceptance - which can burn up 10 or more days of the closing timeframe at put you at risk of late closing.
* Contingency Time Frames - do they start at verbal or written acceptance? This is a big issue in your risk planning.
* Inspection Contingency - make sure have a clear option out if you don't like what you see. BUT... also keep in mind that despite what they say, you can get banks to do repairs. I've had 3 clients in the past 9 months get new roofs from the bank. It just needs to be need a big issue, and carefully presented/negotiated.
* Financing Contingency - make sure there are provisions for low appraisal that allow to get out.
Those are the big issues I often find, but it seems there are curveballs in each REO addendum.
Bottomline, you're typically going to put at risk about $1,000 of your money and a hand full of hair that could turn gray on way to a successful closing - but often you'll get back at least 5% of home's price in a better value.
Best of luck with this!