Homeowners who are facing a foreclosure and can no longer afford or even sell their homes to pay off the mortgage may negotiate with the bank for a short sale. A short sale, also known as a pre-foreclosure sale , is when you sell your home for less than the balance remaining on your mortgage. If your mortgage company agrees to a Short Sale, you can sell your home and pay off all (or a portion of) your mortgage balance with the proceeds. Now not every underwater property qualifies as a short sale. It is still the banks final decision to approve a short sale and it is most of the time in the banks best interest. If the bank will make more money out of a short sale, and it is estimated that the bank saves 25-30% on foreclosure costs to grant a short sale over a foreclosure, than they will agree on it.

To close a short sale there must be four components. An underwater home or a home with negative equity, a willing bank to accept a short payoff for the property, a seller with a hardship (divorce, unemployment, health problems), and a ready and willing buyer to purchase the home at the bank’s appraised value. Real Estate agents are hired to perform a short sale on the sellers behalf. Short Sale Specialists prepare the necessary documents and required paperwork to acquire approval, negotiate with the bank, help the seller price the home so it is attractive enough to buyers and acceptable to the bank.

A short sale benefits both the seller and the buyer. The sellers retain some dignity in knowing that they sold their homes and won’t suffer the social stigma of a ‘foreclosure.’ They don’t have to pay any more mortgages and may be eligible to purchase another home in approximately two years.  Sellers and buyers have the chance to meet each other before closing the deal. Buyers on the other hand are most likely to acquire a well-taken care of home since the sellers can still occupy the homes until the negotiations are closed. The buyers can normally have it within 90 to 120 days and they are getting it slightly below market value.

There are also consequences in a doing a short sale like waiting for the bank to respond, examining of sellers personal records such as tax returns, bank accounts, and other assets, and opening the house for potential buyers. For many sellers though the chance to buy another home in two years versus a 7-year wait is still the real motivation to do a short sale.