Cash or financing doesn't matter to the bank, as long as they get paid at closing the amount on the HUD form they're ok with it.
Regarding the pitfalls of a short sale, there are many. the worst is that it bashes your credit and actually prevents you from being on an FHA or FNA mortgage for 4 years. The real decision should be made around the amount of debt your shedding. if you don't have a chance of paying the deficit of you should take advantage of lenders willingness to write off your debt.

I agree that most of the answers here don't really address Jem's 2 basic questions, especially NonRealtor's cut and chopped collage of confusion, and Mr. Blue's negative rant. ( I'll see you two in a year to see how the year has done - my prediction of a virtually flat market for Laguna Beach and Orange County as a whole, OR, your dire predictions of 20%, or more lower prices. )

Cynthia Fleming's answer does come the closest, however - so she wins the prize for best answer.

Ah, Mr. Blue, or should I say Mr. Doom and Gloom? Still hawking your negative rant blog I see.

Apparently you didn't read the comment below by the ONLY respondant familiar with the Laguna Beach market - Cynthia. She states that the number of available short sales in L. B. is only 22. Most prices these days are already 2002-2003, having come down from the bloated figures of a couple of years ago, but probably becoming relatively more stable every day.

While YOU ( According to your blog which you are pitching.) might think that prices are going to descend another 15-30% in L. B., that isn't looking too likely with the median price in the O.C. actually rising for 5 months in a row - seemingly creating a firm foundation in the lower price ranges, that is starting to trickle into the higher ranges.

The fact is, short sales are becoming easier to work with, both as an agent, and as a buyer.

Web Reference: http://tr.im/BobPhillipsBlog4Coto
A few hours ago
----------------------------------- (Bob's post above, so we can save it for posterity) ------------------------------------
Hi Jem,
The short sales you see will probably be foreclosures soon.

Hi Bob,
Just because the median price is rising for 5 months doesn't make it a healthy market. Let me illustrate

100K 200K 300K 400K 500K 600K 700K 800K 900K 1000K
^
The median in this sequence is 550K
Now lets say they sell all of the 100K, 200K, 300K lower class houses.
The sequence now looks like this

400K 500K 600K 700K 800K 900K 1000K
^
The median in this sequence is now 700K
Did the market really improve?
Or does this show that there is a glut of houses priced over 400K...

Hi Jem,
Looking at Trulia's Stats & Trends for this area (see link below)
http://www.trulia.com/real_estate/92651-Laguna_Beach/market-…
I would wait until the median price is below 560K (year 2000 median price)
Then maybe start looking.
In other words, Wait another year to buy, save another 20% on the price.
Good Luck

Ah, Mr. Blue, or should I say Mr. Doom and Gloom? Still hawking your negative rant blog I see.

Apparently you didn't read the comment below by the ONLY respondant familiar with the Laguna Beach market - Cynthia. She states that the number of available short sales in L. B. is only 22. Most prices these days are already 2002-2003, having come down from the bloated figures of a couple of years ago, but probably becoming relatively more stable every day.

While YOU ( According to your blog which you are pitching.) might think that prices are going to descend another 15-30% in L. B., that isn't looking too likely with the median price in the O.C. actually rising for 5 months in a row - seemingly creating a firm foundation in the lower price ranges, that is starting to trickle into the higher ranges.

The fact is, short sales are becoming easier to work with, both as an agent, and as a buyer.

Jem, I agree with the other comments - short sales are difficult. But one thing is for sure - an INCREASE in the number of short sellers is an indicator that the home values in Laguna Beach are going DOWN. In other words, the value of homes in Laguna Beach is going in the direction of 2003 or 2002 home values and some people who bought in 2005-2008 now own homes that are worth less than they paid. This falling market is why people are upside down and try to short sell. In any event, If you buy a home via the normal process or some other way, make sure your offer price is low enough so that you don't buy something that will be worth a lot less in one year! Good hunting!

Hi Jem, I just checked and there are only 22 short sale listings currently in Laguna. People attempt short sales in order to avoid foreclosure. With the drop in market value of homes, many homeowners owe more on their homes than the home is actually worth right now. This results in a short sale, and all short sales are subject to lender approval. In many cases homeowners have more than one note on a property and when there's a second involved, this complicates the short sale that much more. I've been working on one since last October and we have finally received approval from both banks. Banks are busy and they are not really quick to respond so the process is really dragged out. No guarantees either that the sale will be successful, in some cases the banks foreclose on the property anyway. Another pitfall with short sales is that once you are in escrow, you are required to meet your contingency deadlines which means spending money on home inspections, etc and as I mentioned, no guarantee you'll get the property, so this is a risk and a potential loss of $. I'm dealing with a situation in Dana Point where the homeowner has not agreed to sign a promissory note, and the agent is going to have to take the listing off the market, so it is inevitable that there will not be a short sale, instead they'll foreclose. You can offer whatever you want on a property, cash is better in that you can close quickly, however, if a higher offer comes in with financing, it's up to the bank on which offer to accept. I've seen offers with financing be accepted over cash. Buyers think cash deals allow you to pay less, but this is not often the case. If the offers are similar in price, most definitely the cash offer is accepted. I prefer to seek out the bank owned properties, because these move along more quickly and the bank is not in the business of selling homes, so they just want to unload them as quickly as possible. Also, once accepted, you enter escrow...whereas with short sales, the process takes so long that the listing is kept in Active status and offers continue to be submitted the entire time. Often 20-30 offers are on the table and the offer amounts tend to increase significantly creating a very competitive bidding environment. Most buyers are looking strictly for the deals right now and many of them are all cash buyers. If I can answer any other questions email me at: cfleming@coldwellbanker.com and if you'd like me to keep you up to date on the latest bank owned properties in Laguna, let me know.

Lenders are actually being more responsive when it comes to short sales. I am listing a property shortly where Wachovia is the lender of record. They tell me that they have a response time of 10 business days or less. I think that lenders have learned that time is money, and they would be better off selling as a short sale, than going thru the expense of a foreclosure.
Really the only pitfall is that the lender turn around time coul be lenghty. And yes, lenders could take less than asking with an all cash buyer. But the seller has to first approve the contract...then have the lender approve it.
With short sales...communication is key. Make sure that the agent you are working with, as well as the listing agent are in constant contact with the lender and give you frequent updates.
Don't be afraid....things have really changed int he short sale process.
Good Luck !!

Short sales take time as banks are slow to response for the seller. Your agent can write an offer at any price but do not expect for the bank to take less that offer unless nop other offers are coming in. Just do your home work. All cash defintiely will get their attention.