Short sales have started as a small candle flame and in a small amount of time they have grown into a tremendous 1,000 acre blaze. They are everywhere; short sale this, short sale that. Well what exactly are they?

Short sales are a different beast than REO properties; REO properties are fully foreclosed and short sales are potential foreclosures or pre-foreclosures. A short sale is employed when a house will be selling for less than the amount owed on the mortgage. Let's fire up an example to help illustrate this.

Now this example is completely arbitrary. Let's say that a house was purchased for $250,000. The buyers have lived in the house for a while, and the market took a downturn. Housing values plummeted and now their house is worth less than what they bought it for! let's say, also for example's sake, the house is now appraised at $225,000. Well if they sell the house, they can not get the full amount of money needed to satisfy the mortgage. Up until short sales became a prevalent force in the marketplace, the seller would usually have to come up with some cash to be able to sever the house from their name, and sell it.

Currently, when this situation happens, the seller has the option of applying for a short sale from their mortgage holder. (you can also hear lender, lien holder, bank, etc. : these are all names for the person who holds the "note" on the mortgage) Short sales are thus simultaneously titled "Sale subject to lender approval." Now there are conditions a borrower (mortgagor) must take to get approved for financial amnesty:

1) the seller must show a financial hardship/need for the short sale

2) they must fill out an avalanche of preliminary forms dubbed "the short sale package."

3) in a lot of cases, the bank requires the seller to try to resolve their mortgage or find alternative solutions to their situation.

As you are starting to see, not just ANYONE can short sale a property whenever they wish. There are appropriate hoops one must jump through. A multitude more for whoever is listing the short sale, but that's not our concern here.

So to recap so far to make sure everyone is with me; Short sales = selling a property for less money than they owe on the mortgage. Short sales = needing to get the lender's approval to "forgive" you for the unpaid debt after receiving proceeds for the house.

Now, for potential buyers out there right now looking, you can see the potential for a GREAT deal. When you successfully purchase a short sale, you are getting the house for LESS THAN WHAT THE SELLER EVEN OWES ON THE PROPERTY! Let alone less than what they paid for it. In this regard, they are a smoking deal, yet this pretty rose has some pretty severe thorns just waiting to prick the unsuspecting buyer.

There is no time frame on short sales. Let me say that again, THE TIMEFRAME ON HOW LONG A SHORT SALE TAKES TO PROCESS IS UNKNOWN! There are so many factors going into the short sale process, that its nearly impossible to say when you will get acceptance, or even where the process is at. I'm going to break down what happens (using arbitrary examples) whenever someone buys a short sale property. (already you should be seeing that short sales are a vastly different creature than fully foreclosed REOs)

Ok Mr. Buyer has viewed a property with his REALTOR and wants to make an offer on it. The property is subject to short sale, so extra paperwork is required in the contract to prove Mr. Buyer is aware what he's getting into. (unknown time frame, the property might not even get lender approval, etc.) So Mr. Buyer's agent drafts everything up and sends it over to Mr. Seller's agent. Like a regular Real Estate deal, Mr. Seller is presented with Mr. Buyer's offer and must take action on it (accept, reject or counter) For example's sake, let's assume he just accepts the offer as it is, no counters or problems knowing he's going to be in a short sale situation. Now Mr. Seller's agent has already been working with Mr. Seller to get the short sale package started, permission to discuss Mr. Seller's loan with the lender, etc. The offer comes in, and Mr. Seller accepts that offer, and his agent,along with the full short sale package, and gives the offer to the lender. Now this is where the chaos starts. Now the bank, with absolutely no regard for time, will begin to process the short sale. They need to crunch numbers on their end to determine how much they will lose, how much the mortgage insurance will cover, etc. etc. This is a painstakingly long process, and this isn't even a 1/4 over with. Now, they decide on their numbers (after this offer had passed many hands) and they want to order a BPO (Broker Price Opinion) to help them determine what the property is worth and how much they will allow the seller to sell it for. BPO's take about 7 days to get completed and back to the lender. Now they have to recrunch numbers with the new data. This is about the time they assign a Loss Mitigator/Negotiator. For examples sake, let's say this took 5 weeks to get this far. Well Mr. Buyer and Mr. Seller have had to just sit patiently and wait for all this. (I haven't even added any difficulties yet) Then the negotiator works through it all, works with the listing agent, and FINALLY agrees to do the sale. They draft up a letter to be added to the contract, and that is ONLY the approval! You still have the rest of escrow to go!

As you can see, these can be a very laborious and difficult task. Now some short sales have taken 2 weeks; Some have taken 4 months. It just depends on who the lender is, how they're feeling, is there a 2nd mortgage on the house, How the listing agent is handling it. The last one right there can make or break your short sale. If the listing agent is inexperienced and timid nothing will get done, and the banks knows they can push them around, and make them wait, cause they won't cause a ruckus. (I know it's a very school yard, immature way of thinking, but you'd be surprised at how accurate it is) It's almost as if the listing agent needs to hijack the building and demand the file get written. Nothing short about short sales!

Along with all these other problems typically the property is sold "As-Is". The seller still owes you a SPDS (Seller Property Disclosure Sheet) but the lender does not want to be bound to making repairs. (remember, Mr. Seller needs a financial pardon; So he can't have any money to fix the house. The responsibility then would fall on the lender, and they don't want to part with one cent more than they have to, so they convey the house As-Is) This is why GETTING DETAILED AND THOROUGH INSPECTIONS ARE CRITICAL! IF YOU ARE BUYING A SHORT SALE, GET IT THOROUGHLY INSPECTED BY LICENSED PROFESSIONALS!!!

Now even through all this trouble, Short sales are mostly an amazing purchase. There are hurdles and trouble one will have to go through, but it can be very rewarding. Having knowledgeable REALTORS for these situations are invaluable, so make sure you do your due diligence on REALTORS as well. So there you have a BASIC understanding on how short sales unravel. Now every deal is different, and there will be different hurdles in every deal. This is why having a good REALTOR is crucial; There is no book on short sales, or a magical formula. Each one is different, and require a unique and strong approach to make them work.

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