An out of town friend wants to buy a home for significantly less than the listing price. Typical in this market she figured, so why would her agent tell her that the seller had taken a lot of money out of the home? Why would that matter to her? She figured it wasn't her problem.
For the most part she's probably right. However, if the fact that the seller has borrowed a lot of money means that he can't pay off the entire loan amount, plus costs, commissions, etc., it could result in a short sale.
What is a short sale, and who cares anyway? A short sale occurs when the seller asks the bank to accept less than they're owed on a loan on a property because the seller can't sell the property for enough money to cover the loan and/or the costs of selling the property.
The bank doesn't have to accept a short sale and can take a long time to make a decision. This can be very frustrating to the buyer who may have to wait and wait only to be told that the bank will not accept their offer. On the other hand, if the offer is accepted, it can result in a great deal for the buyer.
A short sale can also have significant tax consequences for a seller. If the lender forgives the seller's debt, it can result in "income" to the seller. This has been somewhat ameliorated by the Mortgage Forgiveness Debt Relief Act of 2007 which allows the exclusion of this "income" under certain circumstances such as when the loan was used to purchase or significantly improve a principal residence.
Thus, in the case of a short sale, both the lender and the seller may have something extra to lose, and the decision to move forward must be carefully considered. And, for the buyer it may mean a significant delay in waiting for a decision to be made on their offer.