On the listing side: I draw on my experience from working with REOs (which is what really happens after a failed short sale), I see that prices for short sale homes were way out of the market price when they were listed and in no way comparable to other listed properties. Maybe that one was an extreme case, but it seems to hold fairly true for a majority of the ones I've seen.
When I price homes for short sale, I price based on a BPO (broker's price opinion). I know some banks have another broker do the pricing, which is fine, but it shouldn't take months if the bank already knows what to do and the buyer has already shown hardship.
There is a lot of misinformation out there, especially in the market that we're in. Short sales are sometimes treated by listing agents as regular homes for sale. And buyers are unaware of the process so it makes it frustrating for those being blind and for those following the blind.
Anyway, that's my frustration with short sales -- it's basically people not getting or giving the right information.
I give my clients as much information as possible on all properties within their budget range to include short sales and REOs. Not all REOs are trashed, and we've found a few that are good deals in terms of price and location.
Because it takes what seems like forever to get a negotiator assigned to a short sale, I tell my clients that we should continue looking in case there are better deals that may come up. After several agonizingly long weeks waiting for responses, some of my clients are now opting to bypass short sales and we are moving on.
I agree with almost everything Susan said, although I do feel that REO's offer an important value. My only concern with Short Sales are that they can extend the period your client (buyer) is waiting for confirmation of an accepted offer. Rather then a response in a week in some of the more extreme cases a buyer can wait up to 30 days to hear whether or not the lender will approve the sales amount.
This creates frustration for a buyer who is anxious to preceed with their loan application and give notice to their current landlord, or even worse if they have a house of their own which is either sold or pending.
In both cases Short Sale & REO the buyer typically is buying the property AS IS, and inspections are often at the cost of the buyer. In REO many banks are agreeable to paying closing costs, where in a Short Sale that burden would be the seller's responsibilty and they obviously are not likely to afford those benefits.
As a wrap up - the buyer needs to be informed about the pros and cons to both avenues of purchase, and it must always be the buyers decision which way to proceed.