Where Short Sales Stumble

(By Bigstockphoto.com)

Frank Borges LLosawho owns the FranklyRealty.com brokerage in Arlington, has analyzed multiple-listing service data for Northern Virginia and estimates that of every 20 short-sale listings that draw a contract from a buyer, only one actually makes it to closing. "I call them fake listings," he said.

Before he will submit a buyer's purchase offer, LLosa sends the listing agent an e-mail questionnaire to measure the prospects for a successful deal. Mostly, he wants to know whether the sellers and their agent have already started the approval process with the lender.

LLosa asks whether the sellers and their agent have submitted a "short-sale package" to the bank. That includes a letter explaining why the sellers face a financial hardship, such as a job loss, and cannot pay what is owed. It also includes details of their finances to demonstrate that they don't have savings or investments that could be liquidated to pay the debt.

Glenn Kelman, chief executive of Redfin, an Internet-based brokerage, cited a number of indicators that a listing advertised as a short sale will really make it to closing. You might be a wasting your time unless you see these signs:

· Only one bank has to approve the sale. "If two banks have to approve the deal, one will get the short end of it, and approval is unlikely," Kelman said. You also don't want to see that there are other lien holders, such as unpaid contractors.

· The seller has stopped paying the mortgage and has already received a notice of default. If the lender is still collecting monthly payments, that lender has no incentive to approve a short sale.

· The bank is ready to deal. Someone at the bank has already approved a short sale, or has at least confirmed receipt of that short-sale package, including a document showing the lender what it would net after taxes and fees, and a market analysis or appraisal that demonstrates that the home is being sold for a reasonable price. "Ask the listing agent who his contact at the bank is, by name and title, and confirm that the paperwork is complete," Kelman said. "Many won't even know what you are talking about."

· The listing agent has experience completing short sales and responds to your inquiries. "To make a deal happen, you need a listing agent pounding on the table with the bank," Kelman said. "But many banks pay the listing agent peanuts, so the agent may be busy with better-paying work."

· And, finally, foreclosure is at least six weeks away. Kelman said it takes at least that long to get a short sale approved, so a foreclosure any time sooner could sweep your deal away.

Unfortunately, foreclosure dates aren't always easy to nail down. Several troubled borrowers I have spoken with over the years have told me they couldn't find out exactly when the foreclosure would happen. And buyers who have succeeded at a short sale have told me they could only guess at the looming foreclosure date.

If you try to buy a home through a short sale, be prepared for the deal to fall apart. Don't spend money on appraisals or inspections until you have received some sort of commitment from the bank. You certainly don't want to give notice to your landlord too early. And keep looking for other, easier deals, just in case.

E-mail Elizabeth Razzi atrazzie@washpost.com.