Short Sale (Real Estate): What It Is, Process, Alternatives, and Tips
Key takeaways
A short sale occurs when a homeowner sells a property for less than the outstanding mortgage balance and the lender agrees to accept the proceeds.
The lender must approve the short sale; approval is not guaranteed and can take weeks or months.
A short sale typically damages credit less than a foreclosure but may still leave a deficiency balance that the lender can pursue.
Buyers and investors can find opportunities in short sales, but should be prepared for more paperwork, longer timelines, and greater due diligence.
What is a short sale?
A short sale happens when a homeowner in financial distress sells the home for less than is owed on the mortgage, and the lender accepts the sale proceeds in lieu of foreclosure.
All sale proceeds go to the lender. The lender may forgive the remaining debt or pursue a deficiency judgment (state law may limit this).
* Short sales are generally used to avoid foreclosure and can be less harmful to credit than a foreclosure.
How a short sale works
1. Lender sign-off: The homeowner must convince the lender that a short sale is appropriate. The lender reviews a hardship package documenting the financial difficulty.
2. Finding a buyer: The homeowner (usually with an agent) must secure a buyer and submit the purchase offer to the lender.
3. Bank approval: The lender evaluates the offer and supporting documentation; this process can take several weeks to months. The lender may accept, reject, or counter the offer.
4. Closing and aftercare: If approved, the sale closes and proceeds go to the lender. Confirm in writing whether the lender will forgive any deficiency and consult a tax advisor about possible tax consequences of debt forgiveness.
Short sale vs. foreclosure
Initiator: Short sale is initiated by the homeowner (with lender approval). Foreclosure is initiated by the lender after missed payments.
Timeline: Foreclosure is often faster; short sales can take much longer due to lender approval.
Occupancy: Homeowners typically stay in the home through a short sale process; foreclosure can lead to eviction.
Credit impact: Both harm credit, but foreclosure generally has a larger, longer-lasting negative effect (e.g., foreclosure remains on a credit report for years).
Alternatives to a short sale
Loan modification or revised repayment plan — may allow the homeowner to stay in the home.
Private mortgage insurance (PMI) advances — PMI may advance funds to bring payments current if recovery is likely.
* Deed in lieu of foreclosure — transferring the deed to the lender to avoid foreclosure (may still affect credit).
Discuss options with your lender before pursuing a short sale.
Preparing for a short sale (seller checklist)
Contact the lender’s loss mitigation department and speak with a decision-maker.
Assemble a hardship package: hardship letter, bank statements, pay stubs, tax returns, medical bills, termination notice or divorce decree, etc.
Consult professionals: an experienced real estate agent, an attorney, and a tax advisor (fees may sometimes be paid from sale proceeds).
Set a realistic asking price that factors in selling costs and potential lender expectations.
* Request any deficiency waiver in writing if the lender agrees to forgive remaining debt.
What buyers and investors should know
Finding short-sale listings: Agents and real estate websites; listings may note “subject to bank approval.”
Work with agents experienced in short sales (some hold Short Sale & Foreclosure Resource (SFR) credentials).
Expect delays: lender review of the short-sale package and offer can take weeks or months; deals fall through if the lender rejects the offer or chooses foreclosure.
Due diligence: short-sale homes often sell “as-is” and may lack typical seller disclosures. Get a thorough inspection and budget for repairs.
Advantages and disadvantages
Pros (for sellers)
Can avoid foreclosure and potentially reduce long-term credit damage.
May result in lender forgiveness of some or all of the mortgage deficiency.
* Seller may pay fewer typical selling fees in negotiated short sales.
Pros (for buyers/investors)
Opportunity to buy below market value.
Short-sale homes may be in better condition than foreclosed properties.
Cons
Lengthy, paperwork-intensive process with uncertain outcome.
Potential remaining debt (deficiency) unless forgiven.
Negative credit impact from missed payments leading up to the sale.
Fewer seller disclosures and higher risk of undisclosed property issues.
Common mistakes to avoid
Failing to document hardship properly — lenders require clear, new financial hardship (job loss, illness, divorce, etc.).
Submitting incomplete short-sale packages — missing documents cause delays or denials.
Skipping professional help — legal and tax issues can be complex.
Not allowing enough time — buyers must be patient and keep alternatives open.
* Assuming deficiency forgiveness is automatic — always get waivers in writing.
Numbers investors should run
Essential cost considerations:
Purchase price
Repairs and renovation costs (materials, labor, permits, inspection)
Carrying costs (mortgage, taxes, insurance, utilities, association fees)
After Repair Value (ARV) — market value after renovations
Profit formula:
Profit = ARV – Purchase Price – Repair & Renovation Costs – Carrying Costs
Investment heuristics (guidelines vary by market):
Rising market: total investment should not exceed ~80% of ARV
Stable market: limit to ~70–75% of ARV
* Falling market: limit to ~60–65% of ARV
Bottom line
A short sale can be a viable option for homeowners facing foreclosure and an opportunity for buyers and investors to purchase below market value — but the process is lender-dependent, document-heavy, and often slow. Sellers should explore alternatives with their lender first, gather a complete hardship package, and get professional help. Buyers should perform rigorous due diligence, work with experienced agents, and be prepared for extended timelines. Consult an attorney and a tax professional to address deficiency and tax consequences.