What is a Short Sale?

When someone owes more than they can sell for, they ask the bank to accept the lower amount. This shorts the bank of their money.

Here is an example. You owe the bank $200,000. You have an offer for $260,000 and don't have the funds for the difference. The bank, after a very slooow process, may agree to accept this.

Now there are a couple of issues with the Short Sale. One is that the bank can take 2 months or more to make a decision. Few Buyer's will wait that long as I can atest. I was told by a Principal Broker that at best, only 2 out of 10 Short Sales are successful. With the current high inventory there isn't much need for Buyer's to wait that long unless your property is very special or unique.

Another issue is that the bank forgiving you the $40,000 may be considered income by the IRS. If you just walk away from the house it is even more likely that you will be taxed on the difference.

For a more lengthy explanation, go here and here. The tax part is tricky and needs to be taken care of by a tax professional.