Lets say you were able to convince both banks and you qualifed for the financial hardship you then would need to list the property with a realtor and here is where the fun begins. just because you have qualified for financial hardship doesnt mean the bank will sell. It has to make financial sense to bank to allow a short sale over letting the property go to the next step which is foreclosure. Okay back to the realtor, his/her job would be to provide a hud statement which is pretty much a break down of all the anticipated costs to the bank and the final dollar amount the bank would get. You would also have to sign an authorization letter giving the realtor authority to speak to the bank on your behalf. Then you list the property for sale.
Once you have a buyer the realtor must submit all of the documentation to the bank for their review. At this point the bank hires a "negotiator" to work the file on the bank's behalf. It can take anywhere from 2 to 3 months for a negotiator to be assigned as the bank are slammed with distressed properties at this time. Once the negotiator is assigned the process officially begins and at this point the bank can send a counter offer to the buyer or they can accept. Mind you this process can take a very long time and the problem with short sales is that buyers dont usually wait around for negotiators to get assigned etc. so usually the buyer is long gone by this time. Put yourself in their shoes....you put an offer on a house and you have to wait 2 months before you even get a response. When there is tons of inventory on the market, chances are youre not gonna wait around for one house so unless they absolutely love the place buyers usually walk
Okay so lets say everything goes through. The short sale is approved the buyer closes escrow and you finally get rid of the house....well its not over. THe bank can now tax you on their loss. So if you originally financed $500,000 and sold for $300,000, they will tax you on the $200,000 difference. You basically have to pay tax on this amount as if it was untaxed income earned by you during the year. You would receive a "1099" from the bank . The good news is that most decent CPA's know how to work around this, YOu would have to prove financial insolvency through your CPA which is anogther long story that I dont feel like writing about. Oh and yes your credit does get affected in a negative way. Although not as bad as a foreclosure, a short sale can damage your credit for a long time.
Bottom line is this....if you can pay the $20,000 difference and avoid a short sale, by all means DO IT!!!! Short Sales are a nightmare for everyone involved. Good agents dont want to deal with them because theyre a waste of time, buyers dont like them cause it takes forever and sellers have to jump through hoops and deal with the tax implications.
All this to realize that there its highly likely that 7 out of 10 short sales wont even go through.
Any other questions feel free to call me. I'm a Real Estate Broker in SF. 415-368-6008. Kevin