A SHORT SALE is simply listing a home for sale for an amount that is less than what is owed on it. For example, if a home is worth $120,000, is listed for sale for $120,000, but has mortgages against it that total $175,000, the listing is considered a SHORT SALE.

A SHORT SALE is often (but not always) done as an alternative to foreclosure.  SHORT SALES are often called Pre-Foreclosure Sales.  A SHORT SALE MUST be approved by the lender (or lenders if there is more than one mortgage (1st, 2nd, 3rd...)).

SHORT SALES are frustrating, time consuming, and require a great deal of paperwork.  Nationwide, only about 1 in 3 SHORT SALES are successful.   

In Colorado, a home is considered to be in foreclosure if the homeowner is more than 30 days late on a payment.  The process of foreclosure is officially begun when the lender files a "Notice of Election and Demand" (NED) with the Public Trustee in the county of the home.  This NED is usually (but not always) not filed until the homeowner is a few months in arrears on payments.

After the NED is filed, the Public Trustee MUST hold the auction no less than 110 days, and no more than 125 days from the date of the NED filing.  Usually, the only bidder at the auction is the lender.

After the auction, usually the lender becomes the owner of the house.  The lender then puts on the home on the market for sale.  It becomes a "Bank Owned" sale, a "Foreclosure" sale, or an "REO" sale (real estate owned (by the bank)).

Once the house is sold, the amount that the bank receives is subtracted from the original mortgage, and a "deficiency" amount is calculated.  The lender can then pursue the ex-homeowner for this deficiency, plus attorneys fees, sales costs, and interest.

When a SHORT SALE or Deed-In-Lieu is done. the lender often insists on financial participation by the seller.  This might be a lump sum payment or a personal note for some amount of money to be paid in the future (or both).

This financial participation is negotiated by the Real Estate Agent (with the lender in your behalf) as a condition of the short sale.  This negotiation is part of the service provided by the Real Estate Agent, and should NEVER require a fee for service to be paid by the seller upfront to ANYONE.

The financial participation amount negotiated will ABSOLUTELY be less than the deficiency (not to mention additional attorneys fees, sales costs, and interest that the lender will spend).  Sometimes there is no financial participation required from the seller in order for a SHORT SALE to be completed.

Alternatives

"Saving the house" has become Priority 1 for most lenders as well as the federal government.  There are programs available that attempt to do just that.  Many lenders require that the homeowner explore these options before they will consider approving a SHORT SALE.

These programs can include interest reduction, principle reduction, and re-amortization.