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A short sale is negotiating with the lender to release the lien that is secured to the property upon receipt of less money than is actually owed, meaning, getting a lender to take less than what is owed on the loan. For example, if a seller owes the lender $80,000 on their property, and the seller sells the property to you for $50,000, the seller is going to be roughly $30,000 short of money to pay off the lender.

Lenders will consider giving a discounted "short sale" payoff when the seller is behind on their mortgage and the loan amount is at, or near, or over the property's market value. An example of this is when the seller is over leveraged, meaning, they owe more than what their house is worth. Sometimes, lenders will even discount the loan payoff when the loan amount is well below the market value, especially if the property is in poor condition.

If the lender can take a discounted payoff now, it saves them from the costs of foreclosure and all the other problems that come with taking back the property. The costs of foreclosure can include not only legal fees, but also taxes, insurance and the expense of maintaining the home until the property is sold and repairing any property damage. Lenders will do a short sale because it has an impact on how much money the government will allow them to lend out on new loans.

If the loan is VA or FHA insured, lenders typically do not want to take back the property. It is especially not in the lenders best interest to file a claim with the FHA or VA if the money they will get back is minimal, because FHA and VA do not insure the entire loan. Some lenders will require the seller to go through counseling class with a HUD approved counselor. This is not required by HUD and it depends on the lender. The lender will approve if they want to do a short sale and will accept the offer price if it comes in close to the appraised value. To the buyer, some lenders will not pay buyer's closing costs.

Some lenders are not open to do a short sale. Even the ones that agree to do a short sale, they may not always agree to give a discount on the loan payoff. Lenders will not discount if the seller is not behind on their payments, because lenders just aren't going to take a discount on a loan that is being paid.

Also, if the property is in excellent condition, lenders are not likely give a low loan-to-value on the first mortgage. A low loan-to-value first mortgage holder will usually only take a discount if the property needs extensive repairs and the seller is filing bankruptcy, which by the way will hold up the foreclosure process.

A short sale will create a tax ramification for the Seller, such that the write off amount will be considered a gift and counted as taxable income to the Seller the next time he or she files their taxes. The Lender will file a 1099-C to the I.R.S. indicating a forgiveness of debt.

You don't have to structure your financing around the existing loan because you are not paying the loan off. If you are going to buy the property yourself, get a private lender. You can line up a buyer (investor) that you can flip the property to by doing a double closing. If you plan to retail the property, you'll need to get a finance able retail buyer.

Properties which the sellers are behind on their payments are also good short sale candidates. The seller should already be at least two to three months behind on their mortgage payments, or already be in foreclosure. "Ugly Houses" can be the best candidates for doing a short sale, mainly because banks are not in the business of rehabbing and playing the role of property manager for that matter.

Properties that have very large second or third mortgages are also good candidates for doing a short sale. The second and third mortgages are typically subject to a very steep discount. If the property goes to foreclosure, chances are those second and third mortgages will get nothing. If you can't get a discount on the first mortgage, try to get a discount on the second or third mortgages. These mortgages are last (if at all) to be paid off.