When you are purchasing a short sale property you do not need to do the inspection before the lender approval. But if you believe there is or could be a potential problem with the property that you would like to negotiate have considered during the lenders negotiations with the seller. I would highly recommend getting an inspection done and then when it is complete get at least three appraisals on to the cost of repairs. You and your agent should then take the front page of your contract and resubmit it to the listing agent and their attorney with an adjusted purchase price. The reason for this is because the lenders do not negotiate the contract after they accept the contract and all the terms. You want to get ahead of the bank and not waste your time on a property that might be in disrepair.
I list many short sales and as a listing agent I recommend that to every buyer and their agent, to many buyers I hear the same thing as these agents have said, "I don't want to spend the $300-$600 for an inspection.", the flip-side is, if you find something it could mean a $5,000-$20,000 reduction in purchase price. I have gone down both roads many times and after the acceptance from the lender I have lost many buyers because they didn't want to have an inspection and found things and were upset that they could not renegotiate with the bank and wasted 3-6 months waiting to receive an answer.
On earnest money, it is treated just like any other deal. You submit an initial amount and it normally goes up after attorney review period, somewhere between 2% to 10% of purchase price. When I preform my short sales I ask for initial earnest money to be the whole amount, so I am willing to accept anywhere from 2% on up. The reason for that is because Illinois is an attorney state, the attorneys will extend the review date out so far that it runs right up to the closing date at times. So if I receive earnest money at that point we will need to jump though hoops to get receipts and bank statements to the lender to prove where the money went, so underwriting can approve the funding and know where all monies are. My way just simplifies the process and everyone knows where everything is at and we are all upfront. If something goes wrong with the inspection or attorney review, just like in a normal sale you can cancel and request your money back.
Good luck on purchasing your next short sale,
Todd K. Fike