A short sale is different from a foreclosure in that the bank has not taken over the property yet and it is still owned by the Seller. However, due to the depreciation of the housing market, the Seller can not sell it for more than what is owed on it. The Seller is upside down, they owe more on the house than it is worth. However, they need to sell it, as they may not be able to afford the payments anymore. They hope they can find a Buyer and present the deal to the bank and that the bank will accept the offer and let them off the hook for the larger mortgage. This process may take many months and the outcome could be that the bank does not accept the deal and forecloses instead or counters with a higher price, even though both Seller and Buyer have agreed. This is why short sales can be very frustrating.
The process starts when the Seller hires an agent to put the home on the market as a short sale. The list price is less than what they owe to the bank for the mortgage. However, the price needs to be thought out, as the bank will not just accept any price. The Listing Agent must prove the price is the market price. Sometimes it must stay on the market for three months before a bank will consider an any offer. During that time, multiple offers may be received. This is the frustrating part for Buyers, as although they may have an accepted offer by the Seller, sometimes the Sellers are not loyal and actually accept several offers in order to get the highest and best deal. Since the bank has the final say, the seller can accept multiple offers. The deal is not consummated until the bank picks one and accepts or counters, if they pick one at all.
Not everyone can short sale a home, as you must prove that you can not afford it. If you have significant assets or make too much money, a bank may not let you off the hook to short sale. You must prove distress.
When bidding on a short sale it is wise to go with the listed price (hopefully the listing agent did their homework and came up with a price the bank will approve). Since the Seller is not making any money on the deal, they have no incentive to list the property at a higher price. They just want a price adequate enough for the bank to accept. To accept an offer at a lower price may get a rejection from the bank or a counter. The Buyer then may not accept the counter and time has then been wasted and the bank may begin foreclosure proceedings. Time is of the essence for a short sale.
Also, as a Buyer of a Short Sale, make sure in the case of a condo and some homes, that the Homeowner Association dues are paid up to date and not behind, as well as taxes. You do not want to be at the closing table and discover you owe past due HOA fees or taxes. These fees can add up.
So Buyers and Sellers beware, Short Sales can be a very long and frustrating process where the bank has the final say. Do not count your chickens before they hatch. Look for Pre-Approved Short sales for certainty.