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Takes place when a buyer purchases a property directly from a lender for a certain discount. The lender usually agrees to a discount on a mortgage to avoid a foreclosure auction or so-called bankruptcy. Lenders could lose money if a property goes to auction plus there are various fees involved the reason why they resort to short sales. Banks, too, normally engage in short sales in a bid to avoid excess inventory or bad loans on their books. The faster they sell properties at a discount, the better for them.

Real estate experts say in a situation where foreclosures are on the rise, more lenders are also discounting properties. Buyers then can take advantage of this opportunity to purchase properties whether for personal or investment purposes. However, some experts believe it is better to make a short sale when a property is still at its pre-foreclosure state. Two phases of pre foreclosure are involved here - when mortgage payments are behind and when a notice of default has been issued as a result of missed mortgage payments. Experts advise buyers to look for the homeowners in the second phase or those who are behind their mortgage payments for more than three months. It is usually at this phase when banks are likely to give discounts to their properties.

There are several other common reasons why banks accept short sales other than the mortgage payments are behind. The property may be in poor condition, the homeowner is facing financial hardships and can no longer afford to pay, the real estate value in the area has depreciated and some shareholders of banks worry when many defaulting loans appear on their books.

Although the best properties to do a short sale on are those that are distressed or homes that need a lot of repair, you can still get a nice house if you wish. To be successful in this endeavor, here are some helpful steps you can follow. First, look for the owner of the property in distress then negotiate with the homeowner and let him or her sign an authorization to release form. From there, you can make a sales contract for the amount you want to offer the bank and let the homeowner sign it.

Banks, of course, require some important documents which the buyer has to accomplish before a short sale can be performed. These are the purchase offer with a cover letter stating the reason why the buyer can't offer the full price, pictures if any, a hardship letter from the homeowner stating his financial situation, a net sheet or closing statement to show how much the bank will gain after the closing costs, taxes and other fees are paid, proof of income and assets, copies of bank statements as well as an estimated list and cost of repairs.

Some lenders may also require a letter of authorization which should include your name, property address, loan reference number, the date and your agent's name and contact information, if applicable. The letter will allow lenders to discuss your loan with interested parties such as your lawyer or closing agent.

The hardship letter, on the other hand, should state your difficulty in meeting your financial obligations and the reasons behind it such as you lost your job, you were admitted to the hospital or encountered some emergencies. Be honest as much as possible because lenders will know if you are not telling the truth.