What Is a Short Sale in Real Estate?

A short sale is one of the more unique types of sales in real estate, where a homeowner sells their property for less than the remaining balance on their mortgage. Since the sales price won’t fully repay the loan, the lender must agree to accept the lower amount. 

While short sales and foreclosures both apply when a homeowner is struggling, foreclosures carry more severe financial consequences. Choosing the short sale route for your property instead of letting it go into foreclosure could help homeowners avoid some of this financial burden and open the door for a fresh start.

These transactions typically involve the following parties: 

• The homeowner facing financial hardship 

• The lender, who must approve the transaction 

• The person buying the property  

• A real estate agent experienced in short sales 

In some cases, you may need to hire a real estate lawyer as well.

Before you search for sale properties being listed for less than what is owed on them, it’s important to know how the process works.

To qualify, you will need to demonstrate that you are facing legitimate financial hardship, such as job loss or divorce. Missing mortgage payments is often part of the lender’s evaluation process. Missing payments will negatively impact your credit score as well.  

A real estate agent will list the home. You should choose an agent who has experience with this type of transaction, as it can be more complicated than a typical listing. Some buyers will shy away from short sale properties, especially if their agent warns them of the complexity associated with the purchasing process.

After you receive an offer, the lender will have to review it. They will compare the offer to the appraised value of the property. This step is often the longest part of the short sale process, as the lender has to decide whether to accept the proposed price.  

If the lender approves, the transaction moves toward closing. While the closing process is similar to that of a traditional transaction, there can be additional paperwork involved. The deadlines may be tighter as well, so make sure you have a real estate agent who stays on top of things.

RELATED: Mortgage Loan Process Explained

Buying a short sale can be appealing, as you may be able to get a property under the appraised value. However, the process can be quite challenging. Here’s what you should know.

Short sale homes are often priced below market value. You could find an appealing home in a neighborhood you like for thousands less than comparable properties. If you are willing to wait through the lender’s approval process, you could close with instant equity on your home.

These homes can be risky. One of the biggest concerns is that the lender may not approve your offer. You could spend weeks or months waiting for an answer, only to face rejection from the lender. These homes are often sold “as-is,” meaning you’ll be responsible for any repairs.  

You will still have an opportunity to book a home inspection as part of your due diligence period, but not all home issues show up on an inspection. Carefully weigh the decision and work closely with your agent to determine whether a short sale home is right for you.

An experienced real estate agent is invaluable when buying a short sale. They help manage expectations and coordinate with lenders. Make sure your agent has worked on short sale deals before from the buyer’s side.

Short sales come with advantages and disadvantages.

They include the following: 

• Avoiding foreclosure 

• Reducing long-term damage to your credit score 

• Gaining more control over your next steps 

Lenders typically view short sales more favorably than foreclosures.

On the downside, the process can be lengthy and uncertain. There is no guarantee you’ll get an offer that your lender will sign off on.

The lender initiates the foreclosure process. Once a foreclosure is started, it will harm your credit score and future buying power. While a short sale still carries negative consequences, it is considered more proactive and less damaging.  

Some homeowners may explore a deed in lieu of foreclosure (DIL). This means ownership is voluntarily transferred to the lender. There are pros and cons to each option, so you should consider professional guidance.

A short sale will likely lower your credit score, especially if you’ve missed several mortgage payments. However, you can typically recover from a short sale faster and become eligible for future financing sooner than with foreclosures.  

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If you are a homeowner dealing with financial hardship, knowing how the short sale process works can help you make an informed decision. If you are a buyer looking to save money on your next home, targeting properties that are listed below market value can be a wise move.  

In both instances, you need experienced professionals by your side to guide you through the complex process.