There are many reasons to consider a short sale. Job changes and relationship changes are a couple. A precipitous drop in the value of a home is another. A short sale can help a seller out of a pinch while avoiding the negative credit impact of a foreclosure. Because of their inherent complexity, however, there are many ways short sales can fall through.
A buyer can legally back out of a home purchase, short or otherwise, for contingencies built into the purchase agreement. Anything that is written into an offer upon which the agreement is contingent qualifies, including an inability to either sell an existing home or qualify for a new mortgage, or any number of other requirements. There are built-in protections for a buyer who gets cold feet and opts to walk away. At the very least, the seller will keep any earnest money the buyer put down.
A Deal Is a Deal -- Until It Isn't
Even when the buyer and the seller have both signed the paperwork -- indicating a binding contract -- only about 40 percent of short sales ever close at all. While unconsummated deals can result when a buyer pulls out, problems with the seller or the lender, who is ultimately in control of the process, often derail short sales. If the seller is not fully forthcoming about structural flaws or liens on a home's title, the buyer can walk. Furthermore, even when a lender agrees to release the lien on a short-sale property, it could still reserve the right to sue the seller at a later date for the deficiency. Faced with this prospect, many sellers balk.
The Bank Rules
Any offer will need to be approved by the lender, usually a bank. The lender will want to see a seller’s debts and assets, and review the purchase contract. It may also want to review the preliminary title report or request additional verification regarding a seller's financial hardship. Most banks have very specific requirements for short-sale offers. If something is missing or out of place, the document doesn’t get processed. Not the speediest of operators in normal circumstances, a lender can create serious logjams when it comes to approving short sales. It's not uncommon for a short sale to take months to complete. If fatigue sets in, the buyer might walk, even if it means leaving earnest money on the table.
Too Many Cooks
The short-sale process is difficult enough to navigate when only one lender is involved. If the primary lender also has to negotiate the terms of the short sale with secondary lien holders, the process becomes even more perilous. Any lien holder who's not on board with the terms of the deal could throw a monkey wrench into the process, one that could set the entire process back months. The second lender may request more information before approval. And even when all the requested information has been provided, a deal is still never a sure thing.
Mike Gonyea served as an account manager and strategic planner at a Detroit advertising agency for 20 years. He has covered automotive finance, state and local government and interfaith issues for publications and websites including “The Detroit News,” American Thinker and A Common Word.