Some REO sellers in some situations will disclose major property defects, such as structural issues, termites, etc.

I have purchased distressed loans with defective collateral and loans held at MERs.

One of those is to put together a cover letter addressed to the asset manager showing all of the defects, just like you might do in a short sale; I initially started trying that with futile results.

If you can prove that the blockage is caused by the tenant not by defective plumbing system, you can ask the tenant to pay for it.

Title defects, buyer financing falls through, inspection reports causes buyer to back out, HOA documents not satisfactory to buyer, HOA does not approve the buyer, house has been damaged since offer was accepted - just to name a few.

Your tactic may be clever with calling it "option" money, but if the buyer truly discovered a serious defect, would you really keep the depisit??

"TENANT SHALL ALLOW LANDLORD OR LANDLORD'S CONTRACTOR TO INSPECT PROPERTY EVERY 3 MONTHS FOR DEFECTS AND NECESSARY REPAIRS.

Sounds like you bought a defective unit and didn't stick a thermometer in it (hint: a refrigerator thermometer is just a few dollars at the big box stores) to verify operation.

Probably a title or defective foreclosure issue.

I generally buy it on a cash deal, but with a lenders policy in place, they'd cure any defects, which almost never, never costs any where near the value to cure.