- A short sale is a real estate transaction in which the buyer pays less than the amount needed to pay off the property owner's debts on the real estate. The seller's lender agrees to take the insufficient amount and release the property lien. While the property owner is the listing party in the transaction, the seller's lender or lenders participate in the transaction. The seller needs her lender's approval in a short sale. Property owners often use short sales as a way to avoid foreclosure.
- Before agreeing to consider a short sale the lender typically requires proof that the property value has dropped, leaving the property owner owing more than the loan balance due. Another consideration for the lender is the seller's ability to meet his loan obligations. A lender might require an appraisal, broker's price opinion or comparative market analysis on the property to determine the property's current value.
- When a lender agrees to a short sale, this typically means the lender agrees to consider a short sale. It is not a guarantee that the lender will agree accept a buyer's offer. Lenders may require the property owner to list the property with a licensed real estate agent who is familiar with short sale transactions. After the property owner accepts an offer from a buyer, the offer goes to the lender or lenders for final approval. Lenders have the option to accept, reject or counter the offer. Depending on how quickly the lender responds, the process can take much longer than a traditional real estate transaction. Some lenders take weeks or months to respond to a buyer's offer.
- After the close of escrow, the lender issues a deficiency judgment against the seller or forgives the unpaid amount. This varies, according to state law and the agreement between the property owner and lender. The seller should consult with an attorney prior to proceeding with a short sale, and obtain in writing from lenders their intentions regarding a deficiency judgment. If the lender does forgive the unpaid amount, which is the difference between the loan balance and the sale price, the seller might be responsible for income taxes on the amount. Some tax exceptions apply, therefore the seller should consult with her accountant before proceeding to determine any tax implications.