How does a short sale work

A short sale means they won't earn any profit from the sale of the house - the bank or mortgage lender gets all the sales proceeds. Home sellers also need a green light from their lender on a short sale - they can't make that decision on their own.

Since the seller earns no profit on a home short sale, they won't be able to steer home sale assets toward the purchase of a new home. Instead, they'll be starting from scratch. Primarily, the big benefit is the increased odds of getting the home for a reduced price, knowing that the house is in short sale mode, and that the owners, and likely even the bank or lender in many cases, will want to sell the home and get out from under the home loan.

As any real estate agent will say, a motivated seller is a seller who wants to cut a deal, so a low-ball offer has a better chance of being accepted in a short sale than in a traditional home sale negotiation. Many home buyers, especially first-time buyers not used to the complexities of the process, may not want to get involved with a short sale. That opens up the field for home buyers with more patience for a short sale, and who'll face less competition for the home.

For buyers, the paperwork process is significantly longer in a short sale usually up to days than in a traditional home sale usually up to 45 days and that may be a deal-breaker for home buyers. Lenders may also get directly involved in the home price negotiations, often asking for a higher sales price than the home seller including the insistence that the buyer make all or most of the closing fees , in order to recoup more money on the home loan.

It's also highly advisable for a short sale buyer to work with a real estate agent well-experienced in the short sale process. It's also strongly advised that a short sale buyer hire a home inspection professional to thoroughly examine the property, as short sellers may not have the financial resources to keep up with home maintenance and repairs.

Receive full access to our market insights, commentary, newsletters, breaking news alerts, and more. I agree to TheMaven's Terms and Policy. In the end, a short sale is about staving off worse outcomes.

A short sale might be able to help you preserve your credit to some degree by helping you avoid a foreclosure on your record. A short sale can take as little as a few weeks or as long as several months. Because short sales are complicated transactions, they tend to be more time-consuming. Plus, the original lender needs to review the short sale offer to determine whether they will accept it.

If the lender believes they can make more money by going through the foreclosure process, they might not accept the short sale proposal. You can reduce the time it takes by working with a real estate agent that has experience with short sale transactions.

A short sale is one real estate deal where you really need to get help from an experienced agent or attorney. Not all real estate agents know how to handle a short sale, so make sure you consult with one who can demonstrate special training and a good track record. Having a real estate agent on your side who knows how short sales work — and who has negotiated others — will increase the chances of closing the deal. Because of the complexity involved in the transaction, short sales fall through relatively often.

However, you can reduce the chance of that happening by making sure the following items are available:. The sadder the story, the better. If the seller has money in the bank, including retirement funds, it is unlikely that the lender will let the debt slide. The proof of income and assets must include income tax and bank statements going back at least two years.

Sometimes sellers are unwilling to produce these documents because they conflict with information on the original loan application, which may not be completely accurate.

The analysis should include a list of comparable properties on the market, and a list of properties that have sold in the past six months or have been on the market in that time frame and are about to close. There may be more than one, so determine how many liens are on the property. The good news is that since late , the IRS has been willing to release a federal tax lien. The IRS is not forgiving the back taxes that homeowners owe; it is just no longer requiring that the lien be paid off before the property can be sold.

A single mortgage lien is an easy problem to solve. Here are some things to keep in mind:. First, try to determine how much is owed on the house in relation to its approximate value. Pass on those in which the owner has a lot of equity in the home — the lender likely will prefer to foreclose and resell closer to the market price. What is the property worth?

Ask the seller or the agent what liens are on the property, and which lender is the primary lien holder. Confirm this information through a title search before closing the deal to make sure there are no undisclosed liens on the property. This is critical. Since they already have a lot of your information in the short sale paperwork, they may be able to expedite the loan application process.

Once an agreement is worked out, it is common the lender will require closing in as few as 20 days. This is too late to start shopping for a mortgage. Finding the decision-maker can be one of the biggest initial challenges. You will first need to have the homeowner complete and sign an authorization letter notarization is usually required , which gives the lender permission to discuss the mortgage situation with you.

Many lenders have an application specifically for a short sale request. Legendary investor Warren Buffett welcomes short sellers. According to him, short sellers are necessary correctives who "sniff out" wrongdoing or problematic companies in the market.

Those interested in learning more about short sales and other financial topics may want to consider enrolling in one of the best investing courses currently available. In real estate, a short sale is the sale of real estate in which the net proceeds are less than the mortgage owed or the total amount of lien debts that secure the property.

In a short sale, the sale is executed when the mortgagee or lienholder accepts an amount less than what is owed and when the sale is an arm's length transaction. Although not the most favorable transaction for buyers and lenders, it is preferred over foreclosure. Securities and Exchange Commission.

National Bureau of Economic Research. Firms ," Pages Accessed Sept. Warren Buffett Archive. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification.

I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. What Is a Short Sale? Key Takeaways A short sale is the sale of a stock that an investor thinks will decline in value in the future.

To accomplish a short sale, a trader borrows stock on margin for a specified time and sells it when either the price is reached or the time period expires. They are also accompanied by regulatory risks.

Near-perfect timing is required to make short sales work. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.