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. There are no, uh, shortcuts.
Here, courtesy of members of the National Association of Exclusive Buyer Agents (NAEBA), is a short 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, says the Phoenix-based NAEBA, whose members work only on behalf of buyers.
-- The negotiating process is far different in that the seller may not care how much is being offered since he won't be taking any money from the sale. The seller may be so anxious to get away from his underwater mortgage that he'll 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 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 on the lender.
"Usually things work out," the buyers' agents report. "But short-sale contract provisions also usually give 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 agent -- and sometimes even the seller's agent -- may not have any knowledge that the seller is negotiating with his 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 prior to the lender's approval. But the buyer loses that money if the lender rejects the deal.
Similarly, if the deal falls through -- even if the buyer gets tired of waiting and wants to move on -- the buyer will lose the money he's forked over for an appraisal, credit report and application fees paid to the lender.
Buyers may not even get their earnest money back. According to NAEBA, sellers are sometimes "frustrated to the point" of refusing to release the buyer's deposit, which can be thousands of dollars.
"Our members have had situations where a seller's lender approves a short sale, then decides to foreclose, and the seller takes out his frustrations on the buyer by not releasing his claim to the earnest money deposit," the buyers' agents report. "The deposits usually end up being returned, but not without additional legal expense and frustration for the buyer."
-- Unpaid homeowner association fees can kill the deal, as can unpaid taxes and utility bills. These become liens on the property that have to be cleared before the deal will close. And guess who's NOT going to pay them? That's right -- the seller and his lender, putting another cost on the buyer's shoulders.
If the seller has a second mortgage, that lender also has to approve the deal. Because subordinate lienholders stand to lose everything if the primary lender forecloses, they often agree to a smaller payoff. But their approval is still needed, which can draw out the process even more. Ditto for mortgage insurance companies.
-- The seller's emotional state can have a big impact on the process. Since there is little benefit -- they rid themselves of a mortgage they can't pay, but their credit is usually already damaged, they get no cash from the deal and they could be dinged with a deficiency judgment requiring them to make up the difference between what they owe and the selling price -- some start a short sale but lose motivation and refuse to complete it.
In other cases, the seller may be listing the house as a short sale just to delay the inevitable foreclosure. And in other instances, the seller makes it difficult to show the property.
"We have witnessed numerous situations where a showing is scheduled, and when the buyers and their agent arrive, the seller is actually inside the home but will not come to the door to let them inside," the buyers' agents warn.