A short sale occurs when a party sells their home for less than what is owed on the mortgages.  This process usually begins after a homeowner is several months behind in their mortgage payments and foreclosure is in the immediate future.  The lender agrees to the short sale so as to avoid the expense of a foreclosure.  The banks are not in the business of owning homes and it is in their best interest to avoid taking possession of homes when reasonably possible.  In a short sale, the bank becomes involved in the negotiations, reserving the right to accept, reject or counter any offers on the home.  They will also require any interested buyer to sign additional waivers and disclosures. 

Short sales are like traditional sales in some aspects.  It is still encumbent upon the homeowner to hire a qualified real estate professional who is experienced in short sales.  This is probably one of the most critical choices to make in the transaction.  Short sales can be tricky at best and require the talents of an experienced agent.  Many of the forms and disclosures are the same ones used in a traditional transaction.  Offers are presented first to the seller, in the case of a short sale, that's the homeowner.  They are either countered, accepted or rejected by the homeowner.  Negotiations continue until terms have been reached that are acceptable to both sides.  From there, the signed agreement is forwarded to the seller's lender for their approval.  The sale cannot proceed without the seller's lender's approval.  They are, after all, the party who is accepting the loss in the transaction, or are they? 

Most lenders reserve the right to pursue a previous homeowner after the short sale of their property in order to collect the deficiency.  In other words, the difference between what was owed on the mortgage and what the home ultimately sold for.  In some recent cases, that has been more than 50% of what the homeowner originally paid for the home.

Another drawback to a short sale is that the process of bank approval can take several months.  It was common throughout 2008 for banks to take 3 or more months to approval a short sale, leaving all parties involved hanging in limbo.  That situation has not improved as of the first quarter of 2009. 

Short sales are still preferrable to a foreclosure, but be prepared to potentially spend several months waiting for answers.