In simple terms, a short sale is the sale of a property where the proceeds from a sale are "short" of the amount due to the lenders.  This usually occurs when an owner of a property experiences a sudden catastrophic loss and is unable to continue making payments.  Rather than let it go to foreclosure, it is beneficial to try to sell the property and get close to what the borrower owes.  The idea is to avoid foreclosure, which is much more expensive for the lender and much more damaging for the borrower's credit score.

Short sales begin with the borrower coming to the realization that they are not able to keep up the mortgage payments.  The next step is to contact a realtor that has knowledge of the process.  They will prepare documents that notify the lender that they are going to act on the borrower's behalf, inform them of the short sale intent, and have the borrower prepare a financial statement that "dequalifies" them from the loan.

Next, property is listed for an amount that is usually slightly below the Comparative Market Analysis (CMA, or comps) for the area.  Hopefully, offers are received at that price.  If not, the price gets lowered at pre-determined thresholds until offers come in.  The realtor will submit each offer to the lender, hoping to find one that meets the lender's criteria for acceptance.  A good realtor will work closely with the lender to try to find what those figures are, but not all lenders are cooperative.

Once an offer is accepted, the escrow process begins, and choosing a title company with an escrow agent that has short sale experience is highly recommended.  Almost all short sales are for properties in "as-is" condition, but some inspections may still be done by the buyer.  Short sales can close very quickly in some cases, as quickly as 2-3 weeks.  However, if the lender is not cooperative in earnest, the process can drag out.  Again, a good realtor can be key here.

Once escrow closes, the borrower is freed of the responsibility for the loan and commissions are paid by the lender to the real estate agents involved.  There are generally two other options besides a short sale.  First, and worst, is foreclosure, where the lender goes through the legal process of taking back the property through the courts.  The second option is Deed in Lieu of Foreclosure, where the borrower convinces the lender to just take ownership of the home.  Both of these options are not all that appealing to lenders as they now own a property (Real Estate Owned, or REO), which is not their core competency.

The short sale is also the least damaging to the borrower's credit, usually only costing them 100-120 points on their credit score.  A Deed in Lieu of Foreclosure is more harsh, costing 150-200 points.  A foreclosure is worst, costing 200-250 points. 

We represent both buyers and sellers in our network for short sale transactions.  Every transaction is different, so don't hesitate to call (602) 315-0576, or email for more information on either buying a property that is in short sale or divesting one of the properties you already own.

Note: Particularly for investment properties, there may be tax and liability consequences for the seller after a short sale, so consult your tax advisor and legal advisor before making any decisions.