Why would a Bank do a Short Sale?
Banks are not in the Real Estate business. Banks are in the lending business; therefore banks are willing to discount mortgages to recover at least part of their investment. Banks will almost always discount.

Take for example, a lender who’s owed $200,000 on a property that’s worth $180,000. If the homeowner would list the property and find a buyer for $180,000 there would not be enough funds at closing to satisfy the mortgage. The funds for the Sale would be Short.

Very often when banks are faced with the alternative of foreclosing on a defaulted borrower, a lender will agree to release the mortgage for a discounted price and accept the offered amount as full payoff of the mortgage.

If the lender decides to go through with the foreclosure, it's going to incur all of the costs associated with the foreclosure and then of selling the property after they take it back. In Minnesota it takes a minimum of 6 months (in most cases) for the bank to take possession of the property and it could take months after that to actually get the property sold. Therefore banks are willing to try and recover some of their investment now rather than later.

The four parties that are involved in short sale are as follows:
1. The owner of the property being foreclosed on
2. A buyer interested in the property; typically an investor that wants a discount
3. Third party servicing the loan, the lender itself, or a servicing company
4. (Conventional, FHA, VA, Freddie Mac, Fannie Mae, etc.)

The person being foreclosed on, must be involved in the short sale process every step of the way. The bank is going to require financial information from them that if you don’t have available will cause the deal to fall through. A short sale package will need to be put together and submitted.