As thousands of would-be buyers have discovered, short sales can be a long shot.
Though selling houses for less than the amount owed on the mortgage has become commonplace, accounting for the lion's share of transactions in many markets, such sales are fraught with complications that can short-circuit the deal.
Here, courtesy of members of the Phoenix-based National Assn. of Exclusive Buyer Agents (NAEBA), is a summary of the ways in which a short-sale purchase can be derailed:
• Often the house is not advertised as a short sale. That's like advertising a house that is not really for sale, because the seller does not have the authority to sell the house at the advertised price.
• The negotiating process is far different in that the seller may not care how much is being offered since he or she won't be taking any money from the sale. The seller may be so eager to get away from the underwater mortgage that he or she will accept just about any offer. But the bank has the final say-so.
• Many lenders will not even discuss a short sale with a seller until a purchase contract is in place. That means the buyer who makes the first offer is a guinea pig, because nobody knows whether the lender will even accept a short-sale offer.
Short sales are sometimes listed at a "ridiculously low price" just to get the ball rolling, the NAEBA warns. Similarly, a seller may agree to any offer, no matter how low and no matter whether it has a snowball's chance of being accepted by the bank, just so he or she can begin negotiations with the lender.
• A short sale is only one remedy lenders can pursue, and often others are taking place simultaneously. For example, a foreclosure can take place at any time and kill the transaction, even after the lender has approved it. According to NAEBA members, in the vast majority of cases, an approval from the lender is not fully binding, giving the lender a path to back away from any transaction.
Likewise, the seller and his lender may come to terms on a loan modification that allows the seller to keep the house. In these cases, the buyer and his or her agent — and sometimes even the seller's agent — may not have any knowledge that the seller is negotiating with the lender until their deal is done.
• Short sales can be long, drawn-out affairs. The timelines are shorter than they used to be, but it can still take months, especially if the seller doesn't have his paperwork in order. And at any time during the process, the lender is free to change the rules, forcing everyone to start over again.
• Once lenders approve the short sale, they often require the sale to close within a short period. Consequently, there is not enough time for the buyer to have the house examined by an independent home inspector. The necessary inspections can always be performed before the lender's approval. But the buyer loses that money if the lender rejects the deal.
Similarly, if the buyer gets tired of waiting and wants to move on, the buyer will lose any money he or she has spent on an appraisal, credit report and application fees paid to a lender.