What Does a Short Sale Mean in Real Estate?

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The real estate sector has many queer entities in its realm. It is advised to have a knowledge of what you are diving into before you do. So, here we will discuss one of the most questionable entity, the short sale. 

What is a short sale?

A short sale occurs when a lender agrees to accept a lower mortgage payoff amount than what is owed in order to help a financially troubled homeowner sell their house. The residual debt is forgiven by the lender.

Purchasing a short sale property is a difficult operation. In reality, only a small percentage of short sales are completed in 30 days. It is a matter of personal preference whether it is worth the extra effort or not. 

From 2008 to 2012, short sales were popular, but they are uncommon in today’s booming housing market. Nonetheless, distressed sales can once again become a part of the home buying landscape. A short sale can result in a good deal on a home, but it usually requires a lot of perseverance and persistence, as well as a lot of luck.  Learn about Capital Smart City!

Short sale or Foreclosure?

Foreclosure is a bigger mayhem that buyers wish to avoid. In a foreclosure, when a buyer is unable to make payments on a house, the bank takes possession of the property. The lender initiates this procedure. The lender would forcibly sell the home in order to recoup as much money as possible from the initial loan.

Buyers prefer short sales over foreclosure for two reasons: 

  • To begin with, a short sale is an entirely voluntary transaction (while a foreclosure is forced). 
  • Secondly, most people are forced to wait seven years after a foreclosure before applying for a new mortgage loan (while a short sale may cause you to wait for at least two years).

Things to Know

A short sale is not the same as purchasing a house at a mortgage auction or one that is directly purchased by the bank, also known as an REO or Real Estate Owned Property. 

These conditions must be met for a sale to be deemed a short sale:

  • A sale can be referred to as a short sale only when the real estate transaction is one in which the seller or lender agrees to accept less than the balance owed on the mortgage.
  • A short sale is done when a house’s value has dropped and the mortgage holder owes more than the house is worth.  
  • The landlord must be so far behind on payments that they are unable to make up the difference.
  • The housing market must have plummeted to the point that the house is now worth less than the remaining mortgage balance.

Misconception about Short Sales

One common misunderstanding is that lenders just want to get rid of the property as soon as possible. Actually, the lender would take as long as necessary to recoup his loss. The thing is, just because a house is classified as a short sale doesn’t mean the lender has to consider your bid, even if the seller does.

This is why the short selling process is a difficult one.

Why Do Lenders Do It?

The only reason a lender would want to go through a short sale—and, as a result, consider a mortgage payoff sum that is less than the balance owed—is that they feel it is the best way to recoup the maximum amount of the mortgage loan. 

Therefore, a lender would refuse to accept a short sale if:

  • The loan is current. If the homeowner is making timely payments, the lender has no reason to believe they won’t be able to do so in the future. (That’s self-evident!) In most cases, a notice of default must be given to the homeowner before the lender may accept a short sale offer.
  • The property owner files for bankruptcy. In bankruptcy, negotiating a short sale is called a collection operation, which is not permitted.

Why Do Home Owners Do It?

If a home owner is choosing the option of short sale, his situation must be quite bad. A short selling for him means that he will lose his house without gaining any profit. They will have to deal with the emotional strain of persuading the investor to let them do it. Short-selling a house is never a good idea; the only reason a homeowner may want to do so is to prevent from foreclosure.

Both the lender and the homeowner must agree to sell the house at a loss in order for a short sale to take place. The homeowner will make no money, and the lender will lose money if the house is sold for less than what is owed. 


Before you buy a house for a “too good to be true” price, learn about the short selling process and speak with your real estate agent for more details. Sigma Properties awaits to assist you through the entire process. In our opinion, it is better to be rational about the situation and walk away if the numbers don’t add up in your favor. 

Author Bio

M Junaid Lead Writer, Content Marketer at Sigma Properties [Real Estate], A writer by Day and reader by night