Short Sale Pitfalls: When to Punt, When to Pass

Although the American real estate market is seeing an avalanche of foreclosures, and although American banks and mortgage companies are hungry for capital, it isn't as easy to buy a property on short sale as you might imagine. Some experts estimate that out of every 20 signed short sale offers made on American real estate, only one ever makes it to closing. Doing a bit of homework before you get involved can save you a lot of time and headache.

A 'short sale' is a real estate purchase in which the buyer offers less than what the seller still owes on the house, and the bank accepts that offer and takes the difference as a loss. Many homes are advertised by listing agents as available for short sale, but that doesn't mean they are. Sometimes, in fact often, using the words 'short sale' in an advert is just as way for the agent to get someone, anyone, to look at a property that is languishing on tough market.

Even when a short sale is a real possibility, it usually takes much longer--up to six months on average--to close the sale than it would if the buyer weren't offering less than what is owed. This means that even in the best of circumstances (that 1 out of 20), buying on short sale is going to be a headache.

In 19 out of 20 cases, the buyer waits and waits while the listing agent, the buyer's agent, the bank, the seller, and various other players in a seemingly endless drama go back and forth signing and faxing lots and lots of papers. At the end of the marathon process, the bank says no and that's the end of it--except, now you've lost six months of your life and have a migraine that won't quit. Oh yes--and no house.

It pays to have your agent or attorney do some footwork before you make a short offer, to save the wear and tear on your nerves and also to increase your chances of success.

Here are a few things you should look for to insure a successful short sale purchase:

Look for a listing agent experienced in short sales. Too often troubled properties are listed by the hundreds with new realtors who don't have time to do much for the buyer. Many barely know what is going on because of the backlog of vacant properties the bank expects them to handle. If the listing agent is inexperienced, see if you can find an agent for yourself who has done this before, preferably many times.

Make sure the seller is already in default and has stopped making payments. Lots of American homeowners are 'upside down' on their mortgages and hope to sell their homes for less than what is owed, but unless they are in or near foreclosure, the bank has little interest in accommodating this and will generally refuse the short offer, especially if there is private mortgage insurance to cover part of the loss should they foreclose.

Make sure the bank or mortgage company is ready to deal. What you are looking for here is a paper signed by a human being at the lender stating that the bank has considered a short sale and laying out the terms and the price as compared to the appraised value. In many cases, you will find that no one at the lender knows anything about how to negotiate a short sale or even if such a thing is possible. You will call and call and talk to dozens of CSRs and get nowhere. If you can't get to a human being with any authority to talk about it (and often you can't), move on to something else. You can waste months getting nowhere with lenders like that, and there are many.

Check for other liens such as HELOCs or second mortgages. Often you get to a good point with the lender only to find out the seller has a second or a home equity line with a different bank, and that other bank will kill the deal deader than dead. Don't waste your breath and risk your sanity arguing over a HELOC-queered short sale. This situation is truly hopeless--Everyone wants their money and no one will get it. Move on.

If you find that indeed you are finally dealing with a real person with real authority at a real lender, and what's more, you are working with an agent or attorney who actually has successfully completed a short sale at least once before, and even better, you are reasonable certain there are no other liens on the property, then by all means, make your best offer, cross your fingers, and then go to a spa or something. Take a mini-vacation. Visit your Mom.

Trust me: It's going to be awhile.

While you're waiting, check out our article on United States Real Estate Prospects for 2009 for more information on how to invest in American property while prices are low and sellers are desperate.