A home that is listed for sale at a price lower than the amount owed on the mortgage. Homeowners hope to sell their home as a short sale to avoid going into foreclosure. What can make it difficult to buy a short sale is that there are often two mortgages on the home and both lenders must approve the sale. The ownership of the mortgages on a short sale home usually belong to more than one party, so you’ll likely have to convince multiple banks and lenders to take a loss on their original loan. This is why it often takes so long to approve a short sale offer. If the short sale fails and the homeowner can’t afford to pay his mortgage, then the bank forecloses on the home.
Short sale homes are still owned by the homeowner, while foreclosures are owned by banks. If the homeowner cannot sell the home through a short sale, the bank initiates foreclosure to try to sell the home directly, often in an auction. If the auction fails to turn up a buyer willing to pay at least what the bank was owed on the home, the home becomes Real Estate Owned (REO), where the owner is the bank. The bank then typically sells the property through a real estate agent.
If you plan to make an offer on a short sale, be prepared for a long haul. And keep in mind that even if your offer is accepted, the bank will usually ask you to buy the home as-is and won’t pay for any repairs.