What is a short sale? & How does it work?

A short sale in real estate is basically "selling a house for less money than is currently owed on the loan".

Why would the lender take less money they are owed?
Normally they wouldn't. Generally a short sale will occur when the borrower has had some financial hardship and defaulted on their loan. After about 3 months of not paying their mortgage the lender will file a Notice of Default and begin the Foreclosure process. The whole foreclosure process costs the bank a lot of money. And, the borrower also owes a lot of money. Generally in a short sale situation the bank is looking to save money. If they foreclosed on a house that is worth less than what is owed they are losing money. And, remember they are loosing even more because the foreclosure process itself is expensive.

Now, if you have a good amount of equity in the home you will not need to do a short sale because you can sale it the normal way and probably come out of the transaction with some money in your pocket. In most cases we've been seeing lately in California the borrower owes more on the loan than the home is worth. So they can't just sell their house the normal way.

In the short sale process everything must be approved by the bank. So what you want to do is get a real estate agent who knows about short sales and can negotiate with the bank for you. It's a good idea to find this agent before you get the Notice of Default because you only have a small amount of time to get your house sold.

What will happen is you will list your house with this agent. The agent will get you to sign a form giving them permission to deal with the bank and anyone else involved. When you get an offer you will most likely need to accept the offer before the bank will approve it. The bank looks over the offer and decides if it's acceptable. This is where the agents bank negotiation skills come in and also the banks reasonableness.

If all goes well the offer gets approved, your house goes into escrow, and hopefully doesn't fall out of escrow for some reason.

Pros & Cons of a short sale.

Pros
You will not have a foreclosure on your credit.
You are in control.
You will most likely be able to qualify for a loan sooner than if you had a foreclosure.

Cons
You still loose your house.
Your credit isn't great anymore.
The bank files a loss and you might have to add that amount to your income and pay taxes on it.

Foreclosure Cons
You loose your house.
No feeling of control over your life.
You have a foreclosure on your credit and it could be 5 or more years before you can qualify for another loan.
The bank tries to get you to sign a note that you still owe the difference or you get same income tax implications that you might get if you do a short sale.

Got to go. If you would like me to touch up on any specific part of this just leave a comment. Don't worry if this post is old just leave a comment about what your looking to have clarified and I'll touch up on it.