Short Sale and Preforeclosure Primer There is no substitute for knowledge. Everyone should seek to learn about different types of transactions before proceeding. Moving forward with your eyes wide open and the assistance of various professional experts is highly advisable. To fully understand short sales be sure to read also Short Sales Bargain Steals and Deals. "...Short Sales are just not happening enough to matter. They remain a clog on the market and are unrealistically priced. We are of the opinion that they are used more for chum for buyers than a sound business model. The failure of short sales has more to do with Banking Guidelines which govern balance sheets..."   Jeff Tumbarello, President Southwest Florida Real Estate Investors Association  Short Sale Defined A short sale exists when the proceeds from a sale will be insufficient to pay the mortgage(s) and other encumbrances on the property in order for the seller to transfer title free and clear. Basically the seller owes more than the property's present market value. In order for the sale to take place the institution (usually "The Bank") must approve all aspects of the sale. This situation is often referred to as preforeclosure also. The reason is, The Bank will not even consider a short sale unless the mortgagee is 60 or 90 days behind in their payments. When this happens it triggers the process that ultimately will lead to foreclosure. A short sale is the only option prior to foreclosure that will help the seller and The Bank while possibly being advantageous to the buyer.  For The Bank The Bank forgives some part of the debt in exchange for eliminating the costs associated with foreclosure and the carrying costs for the property until it is sold. Once a property is bank owned (commonly called REO or real estate owned) it usually begins to deteriorate and the value drops even further in addition to the ongoing expenses. Simply, The Bank would rather be out from under the property quickly and cleanly. For the Seller A successful short sale is advantageous to the Seller as it negates a foreclosure on the credit report. Often times The Bank forgives some or all of the difference and the Seller will not have to repay it. The Seller should consult a tax adviser as there may be adverse tax consequences. However, more often than not, the Seller has negotiated with the bank to repay some or all of the short amount by signing a low interest personal note to be repaid over time. This, in fact, is the area of negotiation that drags out or even derails many short sales. For the Buyer Buyers have the opportunity to buy property under market value. This should not be interpreted as "way under" market value. It behooves The Bank to discount somewhat as they stand to save the costs mentioned above but, they are loathe to approve a sale well below the present market value. Additionally, the Buyer must expect to wait... When an offer is made it becomes one of hundreds (thousands?) The Bank must process so there can be a delay of at least 45 days or more just to get a response. Then, negotiations may ensue. This is very different than the traditional real estate offer with 24-48 hour response. The process can be frustrating but, if you are prepared for it and understand it you will fair better. You must ask yourself, though, what other properties am I missing out on while I wait? In reality, many Buyers lose interest and walk away. Disclaimer: It's not my intent to provide legal, financial or other specific advice outside the scope of my profession as a Realtor and I, therefore, suggest that you talk to your broker/Realtor, financial adviser, and legal council to determine how it's best for you to proceed. This is a complicated subject and learning about it before you dive in is advisable.