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What Is a Real Estate Short Sale?

A real estate short sale is, as the name suggests, a home sale in which the proceeds do not quite equal the loan balance owed on the property. While there can be many causes, the general definition is any time real estate sales proceeds fall short of the loan amount, the sale is considered a short sale.

When do real estate short sales occur?

Short sales often occur when a homeowner cannot pay the mortgage loan payments for their home.  Instead of the mortgage lender pursuing the homeowner to recoup monies, the lender may determine that selling the property at a small loss is preferable.  Interestingly, both borrower and lender must agree to conducting a short sale - it is not a forced decision.  The trade off is that, when both parties agree to conduct a real estate short sale, the borrower is not necessarily released from liability under the mortgage loan to pay the remainder of the loan balance or deficiency.

How does a real estate short sale work?

In real estate short sales, the lender consents to a cut in the mortgage loan balance due to some financial hardship or warranting circumstances in borrower's situation. The borrower sells the home for a price tag below the mortgage loan balance still owed. The borrower takes proceeds from the sale of the home and transfers them to the mortgage lender as a partial pay-off of the mortgage loan balance.

In many cases, real estate short sales leave both parties to the transaction with slight financial bruises. Yet, the short sale is an efficient and economical solution to both parties' problems. Lenders experience a loss in real estate short sales, but that loss is less than the greater loss from total non-payment of the mortgage by a defaulting borrower or the huge costs associated with conducting foreclosures. On the other hand, borrowers are able to control, to some extent, the credit score and file damage that is caused by short sales.

At the end of the day, a real estate short sale is a faster and cheaper alternative for the parties than a foreclosure. It is important to realize, however, that a short sale does not release a borrower from the requirement to repay the lender the deficiency under the mortgage loan. The only time a borrower is excused from such liability for a deficiency payment is when settlement is explicitly and expressly mentioned in the acceptance of an offer.  

Real estate short sales versus foreclosures

The main attraction of a real estate short sale is that it allows both parties to avoid high bank fees that are often associated with the process. From the homeowner's point of view, a short sale usually carries less of a negative impact on their credit score as well. Neither is a good situation, but both deserve consideration if the homeowner's financial circumstances are dire.