A short sale is when a homeowner sells their home for less than the amount owed on the mortgage. This usually happens when someone is having financial troubles and can't keep up with the payments, or the appraised value of a home has fallen significantly, such as after the 2008 recession. This type of sale is much more complicated than a normal house purchase, since everyone with an interest in the house has to agree to accept the terms. This includes all lenders if the house has been used as collateral in more than one loan. It can take several months to a year to process a short sale if one of the lien-holders hesitates or changes their mind.
Lenders will often agree to a short sale because they don't want to go into foreclosure and shoulder the time and expense necessary to take responsibility for the property themselves. On the other hand, they may feel that their interests would be better served in a foreclosure - this is one of the things that make short sales so complex.
A homeowner would undertake a short sale as a last resort as well. It has a much lower negative impact on a homeowner's credit compared to a foreclosure (which is often accompanied by bankruptcy). Depending on the circumstances and available government programs, they might even be eligible to purchase a new home right away. They can also stay in the old house until it is sold, while in a foreclosure they would have to leave.
When a homeowner decides to sell short they should gather up the documents supporting their statement of their financial position - medical bills, bank statements, and so on - and apply for inclusion in the lender's short sale program. Of course, lenders want payment for the full amount of the loan, so they will be reluctant to accept a short sale. It's a homeowner's job to convince them that it is the best option.
A good real estate agent will be invaluable in helping to navigate intricate short sale process. When an offer is made on the property the lenders will have to approve it, and will probably institute certain conditions for the sale.
A short sale might seem like a great deal (and it certainly may be), but there are a lot of things to consider before you decide to buy a short sale house. First, be aware that the property probably won't be in the best condition. The homeowner has more than likely not kept up the maintenance, and you can't expect problems will be fixed as in a normal sale. The property is sold "as-is", so make sure you know exactly what you're getting into before you sign on the dotted line.
Second, be prepared for a lot of extra paperwork and much longer wait times. The lenders will probably try to get you to take on certain fees or responsibilities (such as wire transfer or notary fees) that you may want to decline. Talk to your realtor about what is and is not acceptable to you and they can help you negotiate. It may not be quick and easy, but sometimes a short sale can be the right thing for buyer, homeowner, and lenders alike.