Purchasing a distressed property whether a short sale or an REO (bank owned property) presents its own set of difficulties but can also provide the reward of purchasing a home substantially under market value.
Most Lenders will not consider a short sale without a full package submittal, which typically includes the seller's financial documents, a fully executed contract of sale, proof of funds or a mortgage pre-approval, a preliminary HUD-1 Settlement Statement, among other documents.
As a seller's attorney, my firm normally includes contractual language that makes the contract contingent upon the short sale approval. Further, if there are violations and open liens, I want the short sale bank to approve their payment as well. There are times that the lender will deny payment and I try to avoid having the Seller on the hook for such a payment. The reason they are short selling their home is because they lack assets. I also make the contract "as-is" and vacant at closing because, of course, there is often no money to be put in escrow for repairs or post-closing possession.
As a purchaser's attorney, I want my client to put as little as possible down on contract. That down payment can be tied up for months waiting for short sale approval. I also want a time frame where, if there is no approval, my client can cancel and get her money back - the problem being - you don't know how experienced the person negotiating the short sale really is. I have seen some egregious mistakes on preliminary HUD-1 settlement statements that grossly understate what the true cost to Seller (and ultimately the bank) is going to be to close and give clear title.
As you can see, it is essential to choose representation that is experienced in distressed asset transfers. Short sales are not for neophytes whether realtors or attorneys.