So, what is a real estate short sale? A real estate short sale is when a bank agrees to allow a property to be sold for less than the amount owed on it. There are two conditions that must be met before a bank is likely to approve a real estate short sale:

1. Market values are such that the property's sale price cannot cover the outstanding mortgage balance(s).
2. The owners find themselves unable to continue to make mortgage payments on the property.

As an example, suppose a property was purchased five years ago for $217,000 with an adjustable rate mortgage. Let's say that two years after purchasing the property the owners took out an additional $10,000 second mortgage, which means that today the owners owe $227,000 on the property (note that in five years the amount that the mortgages would have been paid down is negligible).

Further assume that the property is in a part of the country where market values have fallen to $215,000 for comparable properties, and that the adjustable mortgage interest rate has recently increased from 7% to 11%. Finally, add the fact that one of the owners has just lost her job and the makings of a real estate short sale situation become apparent.

Rather than go through the expense and time delays that a foreclosure proceeding would require, the bank may decide that allowing a short sale makes more sense in the long run -- better to have a known amount of money now and the property off of the bank's books than an unknown amount of money at some distant point in the future.

While a real estate short sale is an unfortunate and unpleasant experience for an owner forced to go through the process, it's not the end of the world and it's better than having a foreclosure on one's credit report. On the other side of the coin, a real estate short sale can often represent an excellent buying opportunity for the savvy real estate investor.

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