What Does a Short Sale in Real Estate Mean?

A short sale in real estate is a voluntary process where the homeowner sells the property for a lower amount– less than the actual price– to pay off the mortgage.

For example, Anna purchases a house with a mortgage of $2,500,000. A few months after the purchase, she is laid off from work and cannot make the mortgage payment. Therefore, she sells her property at $2,000,000 to another buyer and uses the fund to pay off her mortgage.

A short sale happens when a property owner falls behind on mortgage payments and is in a financial crisis. Thus, the real estate owner sells their property for less than the actual price to a third party. Then, the proceedings from the sale go to the lenders. However, if the proceeds are insufficient, a deficiency judgment warrant is issued against the defaulting debtor.

All in One Financial Analyst Bundle(250+ Courses, 40+ Projects)

Price
View Courses

250+ Online Courses | 40+ Projects | 1000+ Hours | Verifiable Certificates | Lifetime Access
4.9 (86,142 ratings)

Key Highlights

In this, a borrower sells the mortgaged property for less than the loan balance
Selecting a professional lender and hiring an experienced short sale agent can be an excellent strategy
The short sale process can finish in a few weeks or even last for more than a year
While a short sale is a voluntary approach to settling a pending mortgage, foreclosure is an involuntary method by the lender to take over the property.

How Does a Short Sale in Real Estate Work?

A real estate short sale arises when the property owner is in financial distress
It mostly happens when there is a downturn in the housing market, such as the recession of 2007-2009
The owner, in this case, prepares to trade their property for a lower amount and pay the lender with the funds obtained
As the payment is less than the mortgage amount, the lender has a choice to either waive the remaining amount or opt for a deficiency judgment
In case of deficiency judgment, the lender sends the borrower a legal notice to pay the remaining debt, and the borrower has to make other arrangements
Finally, if the lender waives the debt after the proceedings, the income will be taxed in the US. However, it will not be for tax purposes in India.

Short Sale in Real Estate Process

Persuade the Lender:

The borrower must make sure that the lender agrees on a short sale
They should be persuasive and list their valid financial difficulties, such as job loss, disability, etc

Determine a Price:

After the lender agrees on the sale, the owner must decide on a selling price. They must ensure that the final value includes the expense of selling the home as well
However, there might be a shortfall after the sale. Therefore, the lender can still demand a full/portion of the payment in some areas.

Complete the Paperwork and Look for a Buyer:

Collect all necessary evidence to show that the owner has a financial issue, such as divorce paper, bank statement, medical expenses, termination letter, etc
Create a proposal including all documents and start searching for a buyer for the property after completing the paperwork.

Submit Proposal:

Once the documentation and the buyer are ready, present the offer to the bank
Ensuring that the request has all the required information, like why making the mortgage payment is difficult
Adding any proof can help fasten the process.

How Long Does a Short Sale in Real Estate Take?

Generally, the duration for a short sale approval can last from weeks to months. Sometimes it can also take up to a year
The process involves many factors which may hinder the approval, and thus the process can delay
Additionally, as the bank officials have a majority of proposals, it takes excess time to review the new proposals
Approaching an agent can help reduce the time taken for approval.

Strategies of Short Sale in Real Estate

The buyer, seller, and lender can hire a professional agent to get the best deal
The owner can opt for a loan modification that reduces the loan arrangement
Selecting an ethical and reliable lender can be the best way to mitigate the loan, as they can reduce or waive it.

Short Sale vs. Foreclosure

Short Sale	Foreclosure
A short sale is a voluntary proposal to sell a property for less than what the owner owes as a mortgage	Foreclosure is an involuntary process where the mortgage lender or the financial institution seizes the owner’s property through a legal forum
The borrower can still negotiate with the lender	There is no room for negotiation in this case
The process may take several months	The procedure is quick
As the borrower cannot pay the entire debt, they may have to pay the rest in the future.	As the entire ownership comes to the lender, the borrower does not owe anything else to the lender.

Advantages and Disadvantages

Advantages	Disadvantages
Since it is a voluntary process, the buyer and the seller have choices in the deal, and they can avoid foreclosure	As the property trade happens for a significantly lower amount, the seller and the buyer may end up with a loss
The borrower can approach an agent to reduce the time required to get approval	Sometimes the appointed agent may give wrong information, which might delay the process
It has less impact on the credit score.	The lower selling value may hamper the healthy competition among the investors of a similar property.

Final Thoughts

A short sale in real estate is selling a property at a meager price rather than the market price. The buyer and seller should understand all aspects of the deal before entering into such contracts. Experts with Short Sales and Foreclosure Resource certification have received specific training in short sales, lender negotiations, and buyer protection. Therefore, hiring them can be beneficial.

FAQs

Q1. What are the disadvantages of a short sale?

Answer: One drawback of a short sale is the loss the seller experiences when the property is sold for a considerably lower sum. Additionally, if the buyer/seller chooses an agent and if the agent provides incorrect information, the sale may result in a significant loss.

Q2. What is the difference between a foreclosure and a short sale?

Answer: In a short sale, the owner starts the procedure to exit their financial situation (unable to pay the mortgage). In contrast, a foreclosure is when a lender begins by possessing the property. If required, they evict the homeowner who fell behind on payments.

Q3. Is buying a short sale in real estate a good idea?

Answer: A short sale has mixed results. In the case of a buyer, they may end up with a profit. Short sales may need a lot of time for the seller and even result in a loss. Additionally, the bank may deny the deal and go ahead with the foreclosure for more profit.

Quiz Result
Total Questions	Correct Answers	Wrong Answers	Percentage