Short Sale (Real Estate)
Updated May 12, 2020

What Is a Short Sale (Real Estate)?

A short sale in real estate is when a financially distressed homeowner sells his or her property for less than the amount due on the mortgage. The buyer of the property is a third party (not the bank), and all proceeds from the sale go to the lender. The lender either forgives the difference or gets a deficiency judgment against the borrower requiring them to pay the lender all or part of the difference between the sale price and the original value of the mortgage. In some states this difference must legally be forgiven in a short sale.

In investing, ashort saleis a transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal number of shares at some point in the future.

KEY TAKEAWAYS


  • A short sale in real estate is one in which a house is sold for a price that is less than the amount still owed on the mortgage.
  • It is up to the mortgage lender to approve a short sale.
  • Sometimes the difference between the sale price and the mortgage amount is forgiven by the lender, but not always.
  • For the seller, the financial consequences of a short sale are less severe than those of a foreclosure.
  • For the buyer, it’s important to calculate costs and be sure that there is room for profit when the house is resold.

Understanding a Short Sale (Real Estate)

The term “short sale” refers to the fact that the home is being sold for less than the balance remaining on the mortgage—for example, a person selling a home for $150,000 when there is still $175,000 remaining on the mortgage. In this example, the difference of $25,000, minus closing costs and other costs of selling, is considered the deficiency.

Before the process can begin, the lender holding the mortgage must sign off on the decision to execute a short sale, also known as a “pre-foreclosure” sale. Additionally, the lender, typically a bank, needs documentation that explains why a short sale makes sense; after all, the lending institution could lose a lot of money in the process. No short sale may occur without lender approval.

Short sales tend to be lengthy and paperwork-intensive transactions, sometimes taking up to a full year to process. However, short sales are not as detrimental to a homeowner’s credit rating as a foreclosure.

Short Sale vs. Foreclosure

Short sales and foreclosures are two financial options available to homeowners who are behind on their mortgage payments, have a home that is underwater, or both. In both cases the owner is forced to part with the home, but the timeline and consequences are different in each situation.
A foreclosure is the act of the lender seizing the home after the borrower fails to make payments. It is the last option for the lender, as the home is used as collateral on the note. Unlike a short sale, foreclosures are initiated by lenders only. The lender moves against the delinquent borrower to force the sale of a home, hoping to make good on its initial investment of the mortgage. Also, unlike most short sales, many foreclosures take place when the homeowner has abandoned the home. If the occupants have not yet left the home, they are evicted by the lender in the foreclosure process.
Once the lender has access to the home, it orders an appraisal and proceeds with trying to sell it. Foreclosures do not normally take as long to complete as a short sale, because the lender is concerned with liquidating the asset quickly. Foreclosed homes may also be auctioned off at a trustee sale, where buyers bid on homes in a public process.

A homeowner who has gone through a short sale may, with certain restrictions, be eligible to purchase another home immediately. In most circumstances homeowners who experience foreclosure need to wait a minimum of five years to purchase another home. A foreclosure is kept on a person’s credit report for seven years.

While a foreclosure essentially lets you walk away from your home—albeit with grave consequences for your financial future, such as having to declare bankruptcy and destroying your credit—completing a short sale is labor-intensive. However, the payoff for the extra work involved in a short sale may be worth it.

**Less disruptive alternatives to a short sale include loan modification and utilizing private mortgage insurance. **