short-sale DEFINED

One way for a homeowner to avoid the foreclosure process is for the homeowner to sell the home through a process called a “Short Sale.”  A short sale occurs when the home is in “pre-foreclosure” meaning the owner is currently in default AND the seller owes more to the lender than he or she can sell the home for.  The short sale occurs *before* the lender forecloses on the home and requires the lender's approval because the seller is selling the property for less than the debt owed to the lender. 

For instance, if the seller sells their home for $500,000, but they owe $700,000 to the bank, that would be considered a “short” sale because the bank who originally gave  the seller the loan to buy the property, will not be repaid in full.  For this reason, all short sales require bank or lender approval.

From a buyers perspective, buying a luxury foreclosure or pre-foreclosure is easier than buying a short sale property because a foreclosure/pre-foreclosure purchase is a simple two-way transaction between the seller (or lender) and the buyer who offers to purchase the property.
A short sale however is a much more complex three-way transaction which requires the buyer, seller and lender to agree to the terms of the sale. 

Because the bank does not yet technically own the property, they spend months determining whether the seller qualifies for the short sale (See Overview of the Short Sale Process), while at the same time they are researching the home's current value to evaluate whether the price being offered is acceptable. 

In some cases, the lender may determine that the seller is qualified for the short sale, yet reject the offer being made for the property which can kill the entire deal.  In this case, if another buyer does not surface, the lender may decide to simply take the home back through the foreclosure process and sell it themselves as a bank owned REO. 

Because of the complexity of the lender's research process, it can take 2-3 months after submitting a short sale offer for a buyer to get a bank response and even if the bank approves the deal it can take an additional month or two for the short sale to actually close escrow. 
Most importantly, every short sale buyer should know that when submitting an offer to buy a short sale home, the listing price is meaningless...most of the time.  The majority of sellers attempting to sell their home through a short sale do not know what the bank will accept and have listed their home for sale in the hope that the lender will accept the sales price that the buyer and seller have agreed to.