A short sale occurs when a house is sold for an amount less than the balance of the loan on the house and the bank that owns the mortgage on the house accepts the money as payment in full for the loan. The best way to negotiate a short sale is to structure a deal that benefits both parties.

When pursuing a short sale option, the borrower should make the deal as easy as possible for the bank to accept. The bank knows the borrower is upside down on the mortgage (owes more on the house than the house is worth) and knows that the borrower has the option of walking away from the house. The bank doesn’t want to end up owning the house because they would have significant carrying costs and would have to find someone to take the house off their hands.

If the mortgage holder is presented with a legitimate assessment of the house’s value (from a credible home appraiser who references comparable home sales in the area around the house being short sold), evidence that the borrower doesn’t have significant other assets, and an offer from a legitimate buyer, the bank is likely to accept the offer because it cuts their losses. The offer from the legitimate buyer does not have to be for the full-appraised value of the house, though it should be fairly close.

In most cases, and in any case where a borrower has other assets that the lender might go after to make themselves whole on the loan, has a second mortgage on the property he or she is trying to short sell, has refinanced the mortgage and taken money out of the property by increasing the mortgage amount, lives in a state that does not have an anti-deficiency statute, and wants to short sell an investment property, the borrower should get advice from an attorney who specializes in real estate law before approaching the bank about a short sale.

The tax consequences of short sales can be viewed at http://www.ftb.ca.gov/professionals/taxnews/2007/1007/1007_3.shtml