A short sale happens when the seller cannot sell the home for as much as they owe the bank.

Short sales are different from lender owned homes, homes in foreclosure or auction homes.
In a short sale the seller is usually still occupying the home.  Showings and the selection of the realtor listing the home are still in the hands of the seller. However, the big difference is that when an offer is received all parties start to work with the bank to see if the offer is acceptable to them. What the seller wants for the property does not matter. Yes, they could refuse to sell the home but they are usually desperate and have no choice but to try.

Benefits to the Buyer of a short sale:

Typically the main benefit is price. You are getting a home at a substantial discount compared to similar homes in the area.

Inspection and negotiation.  Unlike an auction or a foreclosure the seller in a short sale voluntarily listed their home and really does want to sell, so they are usually pretty cooperative. You will be able to inspect the home and have time to decide if the home is right for you and in acceptable condition.  Typically you will have a full 17 day (standard in CA) period to inspect the property after your offer is made.

Banks in short sales will negotiate.  If you are a strong qualified buyer or a cash buyer you can usually bargain a little with the bank. The negotiation can take several forms if not in actual sales price at least on some closings costs or repair costs if there is a defect with the property.

Negatives to the Buyer of a short sale:

The time period for a bank to respond is controled by them.  They may take 2 weeks they may take a month. If you are on a tight schedule or trying to move by a certain date a short sale is not the way to go for you.

Banks often times continue their foreclosure action even though the home is being negotiated on.  Once they reach the point of no return you could have the house pulled out from under you and it could go to full foreclosure.  Make sure you know if and when the seller received a Notice of Default.  They only have 120 days ( in California) from that point to sell the home.  While it is possible that they have negotiated to delay that date you as the buyer MUST know if the seller has received their Notice of Defaiult.

This information is specific to Countrywide but is Very similar from Lender to Lender with small exceptions.

Short Sales & Foreclosures:

A short sale is not a foreclosure it is a way to sell your property before it is foreclosed on

1-800-669-6087 – Consumer help Line for consumers with a CountryWide loan.  You do not have to be delinquent to call.

I have been told that a Deed in Lieu  (owner walks away from property voluntarily) is worse than a short sale.  A short sale shows not paid in full whereas a Deed in Lieu shows as a foreclosure.

In a short sale situation the bank will look closely at cash out refi’s in the last 18 months and will probably ask tougher questions about that.

The bank may ask for an unsecured promissory note for theportion of the money you do not repay.  These typically carry no interest and you are suppose to be able to negotiate the due dates for these payments. If it is your primary residence it is probably a "non-recourse" loan and you do not have to agree to this though the bank may still ask.

Countrywide does not offer a workout package in advance. You must list the property for sale and get an offer before they will discuss what they will or won't take for a property. 

Once an offer is received we will need to prepare a package to send with the offer.  This package must include: (The first four items are things you must provide)

1)     A Hardship letter – You write this. Short and sweet with the main reasons you can no longer pay the note as agreed.  Best answers are health, job relocation, job loss etc.

2)     Pay stubs and/or a couple months Bank statements – if you are self employed these need to be business and personal

3)     A list of all monthly expenses you have on the property with the name and address as well as account number of who you pay. Include all utilities/ service people you use to keep the property running.

4)     Authorization Letter for Title/Escrow and Realtor to talk to the bank directly

5)     The Estimated Closing Statement from Escrow (HUD1)

6)     A Copy Of the listing

Time Frame for acceptance of a Short Sale offer:

3-5 Business days to be assigned to a negotiator

8-14 days total for acceptance or counter offer

Other considerations:

If there is a second loan on the property a release letter from the junior lien holder must be received before the first lender can close the deal.

If the property is part of a bankruptcy proceding the lenders cannot do anything.

A lender may issue a 1099 for the portion of the money that they did not get repaid after the sale of the property.  This is considered debt forgiveness by the IRS.   It may be a good idea to specifically ask the lender not to issue a 1099 against you for their loss. There is currently a movement to have the debt forgiven if a seller loses their primary home this way.  However, as of 1/2008 I was informed by a CPA that this does not included investment property or second homes.  Please check with your tax professional to see how this affects your personal tax situation.

Most importantly ask for help from your lender.  Faced with many cases these days lenders are offering to adjust terms, put you in new loan programs or delay payments if you need temporary relief.  If there is no chance in sight that you will be able to pay these obligations a short sale is probably your best alternative to make the most of the situation.

As always, everyone has different circumstances.  It is vitally important that you discuss your options with your tax and legal advisors.  This document is a general overview of the process and does not substitute for the advice of your attorney or tax preparer.