Edit 1/15/2014 Short sales are no longer a common fixture in the Denver real estate market.  However the following information is still relevant for the few short sale there are so I am leaving it on the site. 
As you begin the process to purchase a home, you are going to run into short sale properties for sale in your search area.  Depending on the neighborhood your are looking in, 30% to 40% of the available inventory are short sales.  You will hear many things about buying a short sale; some good, some bad, and some things that are too good to be true. Unfortunately a lot of that information is based on old information, partial facts and rumors which creates a lot of misconceptions about buying a short sale. We call these “Myth-understandings” .  I would like to set the record straight and give you facts based on my personal experience and training.

So much of your home buying transaction’s success depends on having the most current and correct information so that you can make the best decisions. Having an experienced and responsible agent to provide you with that information and guide you through the transaction is even more important in today’s housing market.

Let’s start with what a Short Sale is:

A short sale is a sale where the property is being sold for less than what is owed on the property. The property owner must get approval from the lender or lenders to sell the home for that price before the sale can take place. There are many steps the owner must go through with the lender(s) before they can offer the home for sale, this is called the short sale pre-approval process. The lender(s) will not begin the final approval process until a signed offer has been submitted to them by the owner/seller.  The lender(s) may approve the offer, decline the offer or counter the offer with a higher price that is more acceptable to them.

Myth-Understanding #1:
You can buy these properties for a really low price.

Short sale homes will sell for close to market value (based on their condition).  Which is less than they were purchased for but NOT bargain basement pricing.  When a lender approves a short sale they have done their homework (due diligence). They have sent out an appraiser or ordered a BPO(broker price opinion) from an area real estate agent which will give the lender an idea fair market value.
As your agent I would look at the same information that the agent and the appraiser are using.  I would also factor in the condition of the home and give you advice on an appropriate price to offer on the home.  Too low of an offer often results in the lender(s) declining your offer and also wasting a lot of time.

Myth-Understanding #2:
The banks are hard to work with and you never get approved.

While buying a short sale can be trying, they are not impossible. The first question is do you have the time and patience it takes to hang with your offer to closing.  Many factors need to be considered and I always ask my buyers to not fall-in-love with the home until we’ve done our research. Your agent needs to do his/her homework to increase your chances of success. Success depends as much on the knowledge and experience of the listing agent as the expertise of the buyer’s agent.  There is a long list of questions that I ask the listing agent to determine whether a particular short sale will be a good property on which to make an offer. I have been listing and selling short sale properties for many years and have a good success rate at getting them closed.

Myth-Understanding #3:
It takes months to get approval from the banks and close.

Short sales do take more time than your usual sale.  You should know this up front and decide if you have the time.  I average less than 90 days from under contract to close for my buyers, and this is because of the home work that I mentioned in the previous myth-understanding. Not every short sale is a good short sale to try to purchase.

The time it takes for the offer to be reviewed is strongly dependent on which Lenders are involved and how many loans (liens) there are on the property.  That’s why I ask so many questions before an offer is submitted.  If there are too many factors against a successful sale then I will advise moving on to another property.
With that being said, the process for a short sale approval is being refined and improved by many of the larger lenders, with the smaller ones adopting these techniques as they prove themselves. So I anticipate the time for approval will be getting shorter and more reasonable.

Myth-Understanding #4:
The listed price is the price the bank will accept.

The list price is only the price that the listing agent determined would be a good price at which to advertise the home.  Some times, they base it on previously sold homes in the neighborhood and some times they offer it at a very attractive LOW price to entice people to look at it and make an offer.  The lender(s) will always do their own evaluation of the price. Some listing agents think that a very low list price will start a bidding war between buyers.

Also some listing agents that offer these homes at really LOW prices, unfortunately think that it’s good to submit any offer to get the ball rolling with the bank.  And that once the bank has declined this offer they will have a good idea of what price the bank will accept.  This wastes everybody’s time and is a poor practice because the bank will evaluate each offer that is submitted and in fact go through the same process and take the same amount of time to review the second or third offer.  This is why you need a good agent to help you determine fair market value for a home and if it is even worth the time and effort involved to purchase a particular property.

Short Sales are not the best option for everyone:

Short sales do take time and while they often are priced lower than regular homes for sale they may need immediate maintenance or clean-up to make them liveable for you.
A low price doesn’t always mean a good deal. The properties are sold “AS IS”, meaning the seller cannot pay to have things fixed. You will often find that the properties have not had routine maintenance for a period of time because the owners have just been struggling to make the payments. So the furnace or hot water heater may be old and need replacing or the carpets might be in bad shape. You have to ask yourself if you have the funds available to make these upgrades immediately out of your own pocket.
Also depending on the type of loan you are getting, FHA in particular, the home may not meet minimum required health and safety standards to get a loan. This is why it is so important to have an agent who’s knowledge and experience is current with the ever-changing market, rules and regulations and standards of practice. I don’t take my job lightly and neither should you.