A short sale is defined where the sales proceeds are insufficient to pay the total lien and loans on the property. Ideally, in order to complete a short sale you mast have these 1) a signed contract with the seller at a price that will be close to appraised value 2) Approval from the bank and 3) A release of deficiency for the seller. To accomplish these tasks, it can take from 3 to 12 months to complete a short sale. With that in mind lets go over the potential pitfalls:
1) PROPERTY APPRAISES TOO HIGH- then the bank will want close to appraised value and may ask for more money. If neither party agrees the deal falls apart.
2) TOO MANY LENDERS- if there is more than one loan/ lien, like a first, second plus condo fees plus municipal fines for code violations, and the total demands exceed the value, then the deal falls apart unless the buyer is willing to pay extra. There's a secondary problem with loans that were sold into the securities market where clear title cannot be established.
3) SELLERS ASKED TO SUFFER DEFICIENCY- If the seller is not relieved of deficiency or is asked to pay a contribution to settle the loans, then they may not wish to complete the short sale, especially if they have a good attorney who can defend against foreclosure and buy more time to live free in the property.
4) PMI ( Private Mortgage Insurance) INSURED THE LOAN AND MUST FORECLOSE TO GET BAILOUT MONEY- If the loan was bought by AIG or some other private insuror, then the terms of the policy may require foreclosure before thay can claim TARP (bailout) money. They will deny the short sale and foreclose instead.
5) TAKES TOO LONG- If you are in an appreciating market waiting for short sale approval can mean that you lose out on other deals that have come available. If you have a loan commitment from a bank, it may expire prior to the short sale approval or if approved, may require closing before all your loan tasks are complete.
Despite the pitfalls there are some success stories, and if you have cash and can play the waiting game and have extra money to meet 11th hour demands, then you can get a great deal on a short sale. One of my favorite stories involves a sale that took 18 moths and spanned 3 different buyers. The fisrt buyer got tired of waiting and backed out. The second buyer waited for over 8 months only to find that the bank appraised it way above list, then backed out. In the meantime, values had increased rapidly and the third buyer agreed to the bank approved price: $310K to satisfy the first loan plus $50K to satisfy the second $360K total. After waiting 6 months, the first loan was bought out in a bulk sale of BOA loans, this effectively foreclosed the second and approved the sale for just $310K, by the time we closed the property was actually worth $430K! The buyer felt like he just won the lotto!