Fortunately, as part of a recent amendment to the Making Home Affordable Program, the Obama administration has instituted a new “Foreclosures Alternatives Program” designed to streamline and standardize the process by which banks agree to short sales and deeds-in-lieu of foreclosure. (A deed-in-lieu is an under-utilized arrangement in which the owner simply conveys title back to the bank in order to avoid a foreclosure.) Not only does the FAP offer some (admittedly rather minor) incentives to banks to permit short sales and deeds-in-lieu, but, according to NPR’s Morning Edition on June 2, 2009, the Obama administration intends to create “standards around the application and approval process” and publicize those standards within a month.

If it pans out, this will be great news for buyers, would-be short sellers, and the market as a whole (to say nothing of frustrated real estate agents!) It would be great if we could simply all agree to live by a set of fixed rules and reduce the uncertainty and transaction costs which have bogged down short sales and lead to unprecedented numbers of foreclosures. (Did you know that each foreclosure has been estimated to reduce the value of every property within an eighth of a mile by .9 percent? This usually equates to a couple of hundred thousand dollars in lost equity for the neighborhood. That isn’t good for anyone, least of all for the banks’ bloated REO inventory.)

How can the buyer – or, more likely your agent – separate the wheat from the chaff? Frank Llosa, a Virginia-based real estate broker (and blogger) has created an excellent and very comprehensive screening list of screening questions for the listing agent of a short sale, (assuming, of course, you can get them to answer). Mr. Llosa’s suggested email questions include:

1. Have you closed a Short Sale before?

2. Have you requested and received the short sale package from the bank, including the hardship letter?

3. Have you sent the package AND have you confirmed receipt?

4. What communications, if any, have you had with the bank?

5. Has the bank approved the list price?

6. Have you received any other offers that you are waiting to hear back from the bank on?

7. Does the loan have PMI on it? (Private mortgage insurance)

8. [Are] there one or two trusts? Any other liens?

9. What are the names of the banks? Are these FHA or VA loans?

10. How long do you estimate that the lender will take to provide an answer to an offer?

11. Has your seller completely stopped making payments on their loan.

Unfortunately, as even Mr. Llosa concedes, the chances of getting a response to all of these questions is not great, particularly via email. I prefer to just cut to the chase and see if the property is worth further evaluation with a “quick and dirty” list. Here’s the minimum questions I ask before conducting any further investigation or even thinking about showing a short sale to a client – most likely over the phone:

1. Have ALL the lenders involved approved the short sale price? If not, why do you think they will?

2. Are there any other offers on the property?

3. Do you know how long the lender typically takes to respond to an offer?

If the answers to these questions are satisfactory, and everything else pans out, I may well advise my client to put in an appropriate offer. My next advice is to move along, and continue the house-hunt as if the first offer does not exist. The reason for this is that it can easily take three months or longer to even get a response on a short sale offer, and I don’t want my clients to miss any deals that come along in the meantime. If they find something else, we simply withdraw the original offer. (As you can tell, the short-sale game is particularly suited for investors: I’m not expecting my investor clients to fall in love with a property: if it makes sense, they buy, if not, they should move on. As someone once said, “real estate deals are like buses – if you miss one, there will be another coming along any minute.”)