A “short” sale is where a lender takes less money than what is owed on the loan.  This is done by the lender instead of foreclosing on the property, when the borrower is having trouble making the payments.

As you might imagine, lenders will not take less than what they are entitled to unless they have no better choice.  So, the borrower has to show that they do not have the ability to pay the rest of what is owned on the loan.  When an offer comes in to sell the property, be sure you put a contingency in the contract for the approval of this sale by the lender (s) that will need to accept the short proceeds. 

There may be other issues for the seller in selling “short”.   The amount of the principal portion of the debt that is not paid back to the lender may be taxed as ordinary income.  The other problem with selling short may arise if the borrower did a stated income loan.  If the borrower told the bank at the time of applying for the loan that his/her income was huge, then submits tax returns and other documentation to show that it was nowhere near that amount, the lender may have proof that there may have been loan fraud.

The advantages of this process for the buyer is that they get a home at a great price, below the value of the mortgage balance.  However, the buyer gets a bumpy ride since it will take the lender some time to review and approve or disapprove the short sale.  There may also be other requirements that the lender will put into the transaction as a condition of approving the sale.  Also, if the seller does not have any money to pay the balance on the loan, he/she probably has no money to do any repairs, so the buyer is probably taking the house “as is”.

The short sale will allow the seller to have less of a problem with his/her credit than a foreclosure, although the short sale normally shows as a blemish on the credit reports.  Some lenders will be kinder than others on how they report it.  The sale also allows Realtors to accomplish a sale that would not otherwise happen, although the lender who is going short frequently tries to negotiate the commission down.  Finally, the short sale allows the buyer to get a home at a good price and one that has not gone through the distress of a foreclosure process.

For a more detailed discussion on this topic, please go to http://createagreatdeal.com/negotiating-foreclosures/negotiating-short-sales/theory-vs-practice/.