A short sale is a situation when the current owners of a home owe more than the home is worth and are behind on mortgage payments. Since they can't sell the home and get out from under it, as an alternative, the homeowner can go to the servicer of their loan and ask them to accept less than what is owed on the home if the homeowner can find a buyer for it. Oftentimes, the bank who holds the loan will agree to selling short on the home or taking less than what is owed on it for a number of reasons.
If a home goes to foreclosure, it ends up costing the bank a significant amount of money. First, they will rack up about $40,000 in legal fees. Second, they have to sit on the home for an average of 9 months or so while the foreclosure process goes through the system which means they will not be receiving a mortgage payment for those 9 months or so and will still be responsible for paying all tax and HOA dues. Third, sometimes when a homeowner is foreclosed on, they are very angry at the bank and will take that anger out on the home resulting in significant damage to the property. And finally, when the bank does turn around to sell it, they will have to list it at a below market value to get it sold quickly therefore making it very realistic that will take a smaller loss through a short sale than going through the foreclosure process.
As an example, say a home is worth $120,000 but the owner owes $140,000. After they have missed a few payments, they can go to the bank with an offer from a buyer for $110,000 and see if the bank will accept it. If the bank does, then the seller walks away with a hit to their credit, but not near as severe as if it were a foreclosure. The buyer gets a great deal and in the long run, the bank saves money.
While this seems like a win win for everyone, it isn't always that easy. Most banks are so overwhelmed with short sales, the process takes on average 3 months to just get an answer back from the bank as to whether they will accept the offer or not. This means the buyer could wait, potentially passing up other deals, only to find out that after 3 months the bank will not accept the short sale and will just let the home go to foreclosure. This doesn't happen often, but I recently had one that lasted 9 months and then this exact same thing happened, it got sold at a foreclosure sale before the short sale got approved.
With a short sale, there is definitely the chance you can get a great deal but there is also the chance that you will wait for months and in the end have nothing to show for it. Short sales in Denver aren't for everyone, but if you are curious about it, let me know and we can discuss if it is worth looking into further.