But thanks to?ForeclosureUniversity.com, here is a quick overview (in layman's terms!):
A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. Instead of buying from a seller, you are purchasing the property directly from the lender for a discount.
For example: A homeowner, who is facing foreclosure, has an existing first mortgage of $300,000. The agent writes an offer to the lender for $220,000, which is accepted as full payment for the loan. This is a short sale.
Why are they willing to take such a discount? Several reasons. First of all, banks do not like excess inventory and bad loans on their books; therefore, if they see an opportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished with the headache of it all.
Foreclosures are at an all time high. It is safe to say that most lenders will accept a short sale, however, you may come across one or two lenders who will not discount. If the numbers work out for the lender they will do it.
It does not matter what type of house or condition it's in, all mortgages can be discounted. The best properties to perform a short sale on are the houses that need lots of work and repairs because lenders will give a bigger discount if they see the houses will be difficult to sell. Properties that are over-leveraged are also prime candidates.
Most rookie investors who see a house over leveraged with an upside-down mortgage may think there is no hope for this property. On the other hand, this is a sweet deal to the savvy investor. Properties with large 2nd mortgages are also treated as gold because the 2nd mortgage is wiped out at the foreclosure auction. Lenders with a 2nd and 3rd mortgage position would rather have something than nothing.
Source: http://www.zillow.com/advice-thread/what-is-a-short-sale/475096/
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