How Short Sales Work

Tips for a Successful Short Sale
Real estate agent Shellie Young (right) shows a short sale home to David Sandlin in Miami.
Real estate agent Shellie Young (right) shows a short sale home to David Sandlin in Miami.
Joe Raedle/Getty Images

The first buyer tip for a successful short sale is to use a real estate professional with short sale experience [source: Freddie Mac]. Short sales are complex real estate transactions that require a deep understanding of determining fair market value, how lenders work and what they need to see before they approve a short sale.

In general, avoid homes that carry multiple mortgages and liens on the property. Every additional lender will add months to the approval process and decrease the chances that the deal will ultimately go through. Save yourself some heartache and stick to the properties with only one mortgage lender.

Don't make a lowball offer [source: Toy]. The best you can expect on a short sale is a price slightly below the established fair market value. Remember, the lender is already taking a loss on a short sale, so he's in no mood to be making deals. Keep all offers within a range of comparable sale prices in the neighborhood.

Show that you're a serious buyer. Come with your mortgage preapproval letter and a sizable earnest money deposit, as well as your purchase contract and comp information to demonstrate your offer is realistic [source: Freddie Mac]. The bank will be more likely to approve a sale with a fully committed buyer.

Don't attempt to cheat the system by buying a short sale home from a friend or relative and renting the house back to them. That's illegal according to the rules of arm's length transactions. In real estate, the sales price must be determined by fair market value, not a "friendly" arrangement between two relatives [source: Investopedia]. A short sale between two family members or close friends will not be approved.

Submit all paperwork and documentation in a timely fashion, whether you are the buyer or seller. There is a certain amount of bureaucracy with any real estate transaction (if you've ever attended a closing, your wrist probably still hurts from all of the documents you signed). Short sales add an additional layer of documentation, particularly to prove hardship.

Sellers, be aware of the tax implications of a short sale. In most cases, the IRS treats canceled debt as income. If your lender forgives the $100,000 balance that you owed on your mortgage, the Internal Revenue Service will tax that $100,000 as income. There are exceptions to this rule if the home was your principal residence or you were financially insolvent before the debt was canceled [source: IRS]. Either way, it seems like a good time to call your accountant.

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