In most short sales there is a distress situation—there might be a divorce, a job loss, an illness, family emergency, or another financial obstacle. The seller is usually in default on their mortgage or will be soon, and the seller does not have enough money to cover the deficiency. The seller will always be in a position of owing more money to the lender or lien holder than what can be realized in the sale of the home. The market value of the home will not produce enough money to settle the amount of the lien. A negotiation is made with the lien holder to accept less than the full balance of the loan at closing.
Buying a short sale is not like the traditional home purchase. The asking price usually starts at market value and is reduced in a systematic fashion until a buyer makes an offer. Depending on the situation and how close the seller is to a foreclosure date will be a factor in how often the house is reduced and by how much. You will use standard contract forms as well as a short sale addendum and present your offer as if it were a traditional listing.
Once an offer is made on the house it will be signed by the seller and submitted to the bank and any other liens recorded against the property for their approval. Along with the offer the sellers must submit financial information, a hardship letter and anything else the bank requests. The bank has the final say in the price.
When the negotiation starts most banks are not able to give you an answer immediately. There is a process they must follow in evaluating the property and arriving at a fair market value price. Then they arrive at the approved sale price as well as evaluating the seller’s situation. This might include Broker Price Opinions (BPO's) and/or a full appraisal.
In evaluating the seller, banks will sometimes come back and require the seller to be responsible for the bank approved sale price, which may or may not be the offer price. It is common to see a counter offer from the bank if the offer was well below market value and the lender feels that they can get more for the property. This determination can take anywhere from a couple of days to a few months and sometimes even longer.
During the approval process a buyer can continue to look for another home and in most cases can terminate their offer any time prior to bank approval. In most cases the earnest money is not deposited until the offer has bank approval. Buying a short sale can be as little as 30 days but typically takes a few months to close.