Short sale Q&A from WSJ

Placing a BidOn a Short Sale
By June Fletcher
Question: We are first-time home buyers and found a beautiful house being sold as a short sale. It seems too good to be true, and our real estate agent referred to short sales as playing a game of roulette. Are the risks involved with a short sale too much to handle?

Notice that I didn't put falling in love on this list, since that's what you shouldn't do with this house. A short sale, which involves buying a house for less than the amount the seller owes the lender, can be time-consuming, frustrating, and --- if the lender refuses your offer -- ultimately unsuccessful. If the agent you've been using doesn't want to get involved, ask him or her to refer you to someone who specializes in this sort of work. You also need to hire an attorney experienced in this kind of transaction.
But when home values are dropping, like they are in many places today, and the owner hasn't built up much equity, that's not an option. So some lenders will accept less than the amount owed to avoid the hassle and expense of auctioning the house, providing the owner proves that he doesn't have other assets to make up what he owes.
Even with experienced people at your side, it pays to arm yourself with facts before you make an offer. Don't assume that the house is a bargain, since the owner may have bought the house at the peak of the housing cycle and may owe so much that he can only discount it to current market prices. Find out what comparable houses are selling for, whether a foreclosure notice has been filed for the property, who owns the loan or loans, and how much is owed -- you'll have to deal with them all.
The seller may eagerly accept your offer, but he isn't the final arbiter of the deal -- the note holders are. So make your offer contingent on the acceptance of the lender or lenders. Since the lenders want to know that you can back up your offer, include as much information as you can on your financial resources, as well as a preapproval letter from a lender.
Although the property may be advertised as-is, make sure the deal gives you the right to have and approve home and pest inspections by qualified professionals. Short sellers usually have given up maintaining their homes; you need to know what other expenses to expect.
Also, place a time limit on your offer -- since lenders will sometimes drag their feet, hoping to get a better deal. Short sales rarely take a short time to complete, but you shouldn't wait forever.