In a “normal” sale, the seller has money left over after paying closing costs, commissions and the outstanding balance of any loans/mortgages against the property. This money is known as “net equity”. It is the money the seller puts into her pocket after the sale (but before paying possible capital gains taxes). Unfortunately, there are a growing number of sellers who, due to a variety of reasons, find that they owe more on the property than it is currently worth. They are “upside down”, or have “negative” equity.

There are two ways to handle “negative” equity. First, if the seller had the funds available, he could pay off the negative equity by writing a check to the lender(s) at the close of escrow. This way the lender gets paid in full and there are no adverse consequences to the seller’s credit rating. The second way is with a “short sale”. The assumption here is that the seller does not have a load of cash to make up the deficiency. It is also often that a seller in this situation has stopped making payments on his mortgages and is suffering from a degraded credit rating because of this. Foreclosure could also be on the horizon.

With a short sale, the seller (or seller’s real estate agent) asks the existing mortgage holder(s) to accept less than the outstanding balance on the loan. Under the right circumstances, a bank will agree to this because it will be less costly to them when compared with their only other alternative: foreclosure.

How does an agent get the lender to agree to a short sale? Having successfully closed 5 short sales recently, here’s what I’ve learned: it takes technical skill, a lot of patience, and an understanding on how to negotiate with the bank employee ultimately left with the decision to approve the sale.

Continue Reading Part II for the “How-to’s” of a Short Sale.