What is a Short Sale in Real Estate?

A short sale in real estate is when a homeowner sells their property for less than the amount they owe on their mortgage. This is usually done to avoid foreclosure, which is when the lender takes possession of the property and sells it to recoup their losses.

Short sales can occur for a variety of reasons, such as financial hardship, job loss, or medical bills. In many cases, the homeowner’s property value has declined, leaving them in a position of negative equity, where they owe more on their mortgage than the property is worth.

How Does a Short Sale Work?

The short sale process typically begins with the homeowner contacting their mortgage lender to discuss their financial situation. The lender will then review the homeowner’s financial information and the value of the home. If the lender determines that the homeowner is eligible for a short sale, they will begin the process of negotiating a sale price with the homeowner.

Once a sale price has been agreed upon, the homeowner will list the home for sale with a real estate agent. The real estate agent will market the home to potential buyers and negotiate offers on the homeowner’s behalf. Once an offer has been accepted, the lender will review the offer and decide whether to approve it.

If the lender approves the offer, the short sale process will be complete. The homeowner will sell their home for less than they owe on the mortgage, and the lender will forgive the remaining balance. The homeowner will then be able to walk away from the sale without having to face foreclosure.

Here is a more detailed overview of each step in the short sale process:

  1. Contact your lender. The first step is to contact your lender and let them know that you are considering a short sale. Your lender will be able to provide you with more information about the short sale process and to help you determine if you are eligible for a short sale.
  2. Gather your paperwork. Once you have decided to pursue a short sale, you will need to gather your paperwork. This paperwork will include your mortgage statement, proof of income, and proof of expenses. You will also need to provide your lender with a hardship letter, which explains why you are unable to make your mortgage payments.
  3. Get your home appraised. Your lender will need to have your home appraised to determine its current market value. The appraisal will help the lender to determine whether the short sale price is acceptable.
  4. Find a buyer. Once your home has been appraised, you will need to find a buyer. You can work with a real estate agent to help you find a buyer and to negotiate a sales price.
  5. Get your lender’s approval. Once you have found a buyer, you will need to get your lender’s approval for the short sale. Your lender will review the sales price and the appraisal to determine if the short sale is in their best interest.
  6. Close on the sale. Once your lender has approved the short sale, you can close on the sale of your home. The proceeds from the sale will be used to pay off your mortgage and any other liens on the property.

Benefits of a Short Sale in Real Estate

A short sale in real estate has a number of benefits for both the homeowner and the lender.

Benefits for homeowners

  • Avoid foreclosure. Foreclosure can have a devastating impact on a homeowner’s credit score and financial future. A short sale allows a homeowner to sell their home and avoid foreclosure.
  • Sell the property quickly. Short sales can often be closed faster than traditional home sales, which can be helpful for homeowners who need to sell their home quickly due to job relocation, financial hardship, or other reasons.
  • Avoid a deficiency judgment. In some cases, a lender may sue a homeowner for the difference between the sale price of the property and the amount owed on the mortgage. This is known as a deficiency judgment. A short sale can help homeowners avoid a deficiency judgment.

Benefits for lenders

  • Reduce losses. Short sales often allow lenders to reduce their losses on a loan. This is because lenders are typically willing to accept a lower sales price in order to avoid the costs and time associated with foreclosure.
  • Maintain relationship with homeowner. By approving a short sale, lenders can maintain a positive relationship with the homeowner. This could lead to future business, such as the homeowner refinancing their mortgage with the same lender in the future.
  • Avoid negative publicity. Foreclosures can generate negative publicity for lenders. By approving short sales, lenders can avoid this negative publicity.

Why Do Short Sales Happen?

There are a number of reasons why a homeowner might choose to pursue a short sale. Some of the most common reasons include:

  • Job loss or income reduction
  • Divorce or separation
  • Medical bills
  • Unexpected financial hardship
  • Negative equity (when the value of the home is less than the amount owed on the mortgage)

How to Get a Short Sale Approved

To get a short sale approved, homeowners will need to submit a package of documents to their lender. This package will typically include financial hardship documentation, such as proof of job loss, medical bills, or divorce. The lender will also review the homeowner’s property to determine its value.

Once the lender has reviewed the homeowner’s package, they will decide whether to approve the short sale. If the lender approves the short sale, they will negotiate a payoff amount with the homeowner. Once the payoff amount is agreed upon, the homeowner can list their property for sale.

Buying a Short Sale Home

If you are interested in buying a short sale home, there are a few things you should keep in mind. First, the short sale process can be lengthy and complex. It is important to be patient and to communicate regularly with your real estate agent. Second, you may need to be flexible with your offer price and terms. Lenders are more likely to approve short sales for buyers who are willing to make a competitive offer and who are able to close quickly.

Tips for Buyers of Short Sale Properties

Buying a short sale property can be a great way to get a good deal on a home. However, it is important to be aware of the potential risks involved. Buyers of short sale properties should:

  • Get pre-approved for a mortgage before making an offer on a property.
  • Be prepared to wait. Short sales can take longer to close than traditional home sales.
  • Be flexible with the closing date. The closing date may be delayed several times due to the short sale approval process.
  • Be aware of the condition of the property. Short sale properties may not be in good condition, and buyers may be responsible for making repairs.

What’s the Difference Between Short Sale vs. Foreclosure

The main difference between a short sale and a foreclosure is that a short sale is voluntary and a foreclosure is involuntary. A short sale is initiated by the homeowner, who needs to get the approval of the lender to sell their home for less than what they owe on the mortgage. A foreclosure is initiated by the lender, who takes legal action to repossess the home if the homeowner falls behind on their mortgage payments.

Here is a table that summarizes the key differences between short sales and foreclosures:

CharacteristicShort SaleForeclosure
Initiated byHomeownerLender
Lender approval requiredYesNo
Impact on credit scoreLess negativeMore negative
Time to completeLongerShorter
Deficiency judgment possibleYesNo

Short Sale Alternatives

There are a number of short sale alternatives available to homeowners who are facing financial hardship. Some of the most common alternatives include:

  • Loan modification: A loan modification is a change to the terms of a mortgage loan, such as reducing the interest rate, extending the term of the loan, or forgiving some of the principal balance. Loan modifications can be a good option for homeowners who can afford to make lower monthly payments, but not the full amount of their current mortgage payment.
  • Forbearance: Forbearance is a temporary reduction or suspension of mortgage payments. Forbearance can be a good option for homeowners who are facing a temporary financial hardship, such as a job loss or medical bills.
  • Refinance: Refinancing is the process of getting a new mortgage loan to replace the existing mortgage loan. Refinancing can be a good option for homeowners who can qualify for a lower interest rate or a longer term on their mortgage loan, which can reduce their monthly payments.
  • Deed-in-lieu of foreclosure: A deed-in-lieu of foreclosure is a voluntary agreement between the homeowner and the lender to transfer the ownership of the home to the lender in exchange for satisfying the mortgage debt. A deed-in-lieu of foreclosure can be a good option for homeowners who want to avoid the negative impact of foreclosure on their credit score.

Is It a Good Idea to Buy a Short Sale Property?

Whether or not it is a good idea to buy a short sale property depends on your individual circumstances and the specific property you are considering.

Here are some of the potential benefits of buying a short sale property:

  • You may be able to get a good deal on a home. Short sale properties are often sold at a discount to their market value. This is because the lender wants to recoup as much of their losses as possible, but they are also motivated to sell the property quickly.
  • You may be able to negotiate on the terms of the sale. For example, you may be able to get the seller to agree to make certain repairs before the sale closes.
  • You may be able to avoid a bidding war. Short sale properties are not always as popular as traditional home sales, so you may be able to get the property without having to compete with other buyers.


Short sales can be a good option for homeowners who are struggling to make their mortgage payments. They can also be a good opportunity for buyers to purchase a home at a discounted price. However, it is important to understand the short sale process and to be prepared for the challenges that can arise.

Frequently Asked Questions (FAQ)

Why is it called a short sale?

A short sale is a type of real estate transaction in which the seller sells the property for less than the amount owed on the mortgage. The term “short sale” comes from the fact that the seller is coming up short on the amount owed.

What is the short sale method?

The short sale method is a process of negotiating with the lender to allow the sale of the property for less than the amount owed on the mortgage. The lender may agree to a short sale in order to avoid foreclosure, which can be costly and time-consuming.

What is an example of a short sale transaction?

A homeowner may be eligible for a short sale if they are facing financial hardship and cannot afford to make their mortgage payments. The homeowner would first need to contact their lender and explain their situation. The lender would then review the homeowner’s financial information to determine if they are eligible for a short sale. If the lender approves the short sale, the homeowner would then work with a real estate agent to sell the property.

What are the two types of short selling?

There are two main types of short selling: covered short selling and naked short selling. Covered short selling is when the seller borrows the security they are selling before they sell it. Naked short selling is when the seller sells a security without borrowing it first. Naked short selling is a more risky form of short selling and is generally not allowed by brokers.

Is short selling allowed in Islam?

Short selling is not explicitly forbidden in Islam, but there are some scholars who believe that it is unethical. These scholars argue that short selling is a form of gambling and that it can be harmful to the market. Other scholars believe that short selling is permissible as long as it is done in a fair and ethical manner.

Short selling is legal in most countries, but there are some restrictions. For example, in the United States, naked short selling is prohibited.

What are the benefits of short selling?

The main benefit of short selling is that it allows investors to profit from a decline in the price of a security. Short sellers can also use short selling to hedge against losses in their portfolio.

What is the risk of short selling?

The main risk of short selling is that the price of the security could go up instead of down. If the price of the security goes up, the short seller will lose money. Short sellers can also be subject to margin calls, which require them to deposit more money into their account to maintain their short positions.

What are the disadvantages of a short sale?

The main disadvantage of a short sale is that it can damage the seller’s credit score. Short sales can also take a long time to close, and the seller may have to continue making mortgage payments while the sale is pending.

Is short selling good or bad?

Short selling can be both good and bad. It can be a good way for investors to profit from a decline in the price of a security, or to hedge against losses in their portfolio. However, short selling can also be risky, and it can damage the seller’s credit score.

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Razib is a skilled writer with 5 years of experience specializing in technology, finance, automotive and real estate. A BBA graduate from 2014, Razib's passion for these industries shines through in his informative and engaging content. His ability to break down complex topics and stay current on the latest trends makes him a valuable resource for readers seeking to understand these dynamic fields.

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