Short sale investors hoping to cash in quickly by “flipping” houses in this real estate market are in for a surprise. The length of time it takes to close on a house has increased substantially, and that won’t change anytime in the near future. Banks are notoriously fickle when it comes to short sales. Often the bank doesn’t commit itself to the short sale until days or even hours before closing, and can even change its corporate mind at the last minute about going through with the closing.

This can cause severe financial problems for the seller who may already be cash-strapped, and may require the short sale investor to hold onto properties much longer before selling them. For sellers, not being able to sell a home means not being able to pay bills that may have mounted during the sale process. Money that would otherwise go toward paying bills and rebuilding credit may instead need to be diverted to support an unaffordable home – if only to persuade the bank to approve the sale.

For the homeowner, getting out from under mounting home-related debts, avoiding debt collection, legal actions, and foreclosure are paramount. Unfortunately, the slow closing process on short sales often interferes, bringing forth the financial ruin sellers were hoping to avoid in the first place.

The bottom line is that there’s nothing short about a short sale. Sellers should plan to spend no less than 4-6 months negotiating the closing and should also be prepared to deal with the fallout of frustrated creditors and would-be investors during this period. Once a short sale is concluded, sellers should plan to spend 2-3 years rebuilding their credit before attempting to apply for a new home mortgage.

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While some analysts are saying that rises in home prices and increased home sales are a harbinger of recovery, most experts are only cautiously optimistic. One of the reasons for their restraint is the extremely large number of option-ARMs and ARMs that are scheduled to “reset” in the next 24 months. If past experience is any indicator of what happens when ARMs reset, this could send another flood of short sale homes and foreclosed homes into an already heavily saturated real estate market.

Even though banks are no longer making “stated income” loans, the number of home loans whose interest rates can or will reset is staggering. The potential risk is exceptionally high (reaching into the millions) and consumer credit, especially for those homeowners who are underwater on their existing mortgages, is nowhere to be found. Without the ability to refinance into lower fixed-rate mortgages, experts fear that millions of consumers will join the pre-foreclosure crowd between now and 2012.

The impact could be huge. Nearly 100 banks have already failed in 2009. For those institutions that aren’t properly capitalized, 2010 and 2011 could be just as tough. That places additional burden on the FDIC and the Treasury Department to come up with workable solutions that can either keep people in their homes or get them out of otherwise valuable property with the property intact.

The Treasury promises new guidelines for homeowners who want to get out of home ownership in a semi-controlled way. Combined with the Hope for Homeowners program waiting in the wings, the administration is confident that these programs will help stem the tide of foreclosures. The real problem with these programs is that they address only the properties that are in distress today and may not be equipped to deal with the rising tide of home foreclosures that will occur in the absence of refinancing options, tight consumer credit, and high unemployment.

Treasury expects to release new short sale guidelines later this month. Whether the streamlined short sale procedures enable homeowners to exit their homes quickly remains essentially in the hands of private lenders, and therefore largely out of the government’s control.

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Homebuilders are excited by the prospect that the recent uptick in home sales supports the idea that a recovery is underway. Experts are divided on whether this is the case. Nationally, foreclosures dropped and home sales edged upward slightly in August, but a record number of foreclosures were filed in the months prior to August.

Foreclosures are still climbing in many key foreclosure states including Nevada and Michigan, and more states have enacted or are considering moratoria on foreclosures. Overall, the data seem to indicate that legislated delays inserted into the foreclosure process are not effective in the long term at preventing a large number of foreclosures. Many homeowners are not making payments on their homes due to unemployment and underemployment. Still others are walking away from residential, vacation and investment properties whose values have dropped substantially, are unsalable due to the size of the mortgage balance, and have few prospects of recovering their value in the near future.

While sales prices have edged upward, and there are many excellent deals to be found in real estate right now; the careful short sale investor will take advantage of deals as they arise. The fundamentals of property purchasing haven’t changed. Is the property in a good location? What are the property’s serious defects, if any? Will repairing the defects merely help the property retain value or will it lead to improvement in value? What are the near-term prospects for this property? What are the mid-term prospects? Does the property have long-term value potential? What kinds of buyers would be interested in purchasing this property?

Other considerations include financing. Can you finance the purchase of the property? Do you need to? Can you hold onto the property as long as is needed to comply with lending requirements? Will your lender allow you to lock in you rates for longer than their standard lock-in period? Can you afford to wait on this property, or are there several other properties you could purchase and get the same benefits?

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Short sales should be the preferred option over foreclosure and offer stiff competition to loan modification programs, according to new research conducted by Amherst Securities Group.

Short sales mitigate the lender’s loss and limit it to 20%-40%, where foreclosures often recover less than half of the loan’s remaining value. Amherst also says that Hope For Homeowners is a more promising solution for loan modification than the Home Affordable Modification Program (HAMP). The Hope For Homeowners (H4H) program is favored over HAMP because it allows the homeowner to regain equity in his or her home and allows the troubled mortgage to be re-written into a FHA insured mortgage.

Most loan modification provisions of the HAMP option are not useful for borrowers who need to reduce payments beyond their current levels, and offer no options for adjustable-rate mortgages that are already using 40-year terms. For homeowners in these circumstances, short sales and foreclosures are the only viable options.

Ultimately, loan modification programs assume that homeowners want to keep their homes. There are a growing number of homeowners who simply want to get out from under a mortgage. These homeowners include people who need to move to pursue job opportunities elsewhere, couples who are divorcing, and homeowners who can no longer take care of a home or who find homeownership undesirable for some other reason.

For these homeowners, despite the downsides of each option, short sales and foreclosures still represent the best options to get out from under their homes.

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The US Treasury says it will soon release new incentives to make short sales more attractive to lenders. The new short sale guidelines are expected by the end of this month. Treasury Secretary Timothy Geithner hinted at these short sale incentives in an interview last month. FHA commissioner David Stevens confirmed the new program in testimony before Congress last week.

According to Stevens, the program will facilitate short sales for borrowers who are generally eligible for loan modifications but cannot qualify due to their specific circumstances or who cannot otherwise complete the loan modification process. Stevens says that the goal of the program is to avoid foreclosure proceedings and to preserve the property’s value by reducing the length of time a property is vacant. Stevens says that the program will do this by offering a standardized short sale process, reducing the documentation that is required to complete a short sale and by shortening the length of time in which a short sale can be completed.

The incentives will likely apply only to properties whose mortgages are backed by Fannie Mae or Freddie Mac. One of the major stumbling blocks that lenders have encountered when it comes to short sales is that mortgages that have been securitized may require approval from several investors before they can proceed. In the interim, the property value drops farther, or short sale buyers get frustrated, lose their financing, or move to properties that offer a better promise of closing the sale.

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