Real estate agent discusses short sale with clients

What Is A Real Estate Short Sale?

A short sale in real estate is a transaction in which the owner sells a property for less than what is owed on it. Let’s do a deep dive into this type of real estate transaction and learn how a short sale works. We’ll also discuss the pros and cons of short sales for sellers and buyers.

Understanding Short Sale

A short sale in real estate occurs when a homeowner sells their home for less than what they owe on the mortgage. To qualify for a short sale, the seller must be experiencing financial hardship and not have enough equity and assets to pay off the mortgage after closing costs.
While this is a simple explanation, a short sale is much more complicated – as the mortgage company must agree to the transaction.

How Does Short Sale Work?

Here’s how a short sale typically works:

  1. The homeowner cannot make mortgage payments on the home.
  2. The homeowner contacts their mortgage company to explain their situation and request permission to sell the property for less than the outstanding mortgage balance. It’s worth noting that for a short sale to occur, the home has to be worth less, based on the sales of comparable properties, than what the homeowner owes on it. In addition, the seller must prove that they don’t have the income or assets to pay the outstanding loan.
  3. Next, the seller, with the help of a real estate agent, must prepare a financial package for submission to the mortgage institution. This may include a hardship letter, tax returns, W-2s, payroll stubs, bank statements, and a comparative market analysis of the property.
  4. The real estate agent prepares a preliminary net sheet to break down the house’s sale price and list each entity to be paid at the closing. (Of course, there should be no listing of a payout to the home’s seller for a short sale.)
  5. The lender may or may not agree to the short sale. In addition, the mortgage company may forgive the difference between what they receive from the sale and what is owed. Or, the mortgage company may respond with a deficiency judgment requiring the original borrower to pay the loan balance.

Of course, this is an oversimplification of the process. The mortgage company may assign several negotiators to oversee the short sale process. In addition, the buyer and seller may be required to sign an affidavit stating neither party knows the other.

Pros and Cons of Short Sale

As a real estate agent, you may work with both buyers and sellers on short sales. They must understand the pros and cons of this type of transaction.

Pros and cons of a short sale for sellers

Why would a homeowner initiate a short sale for their property? While challenging, a short sale is often the best choice for a homeowner. Here are the pros and cons of a short sale for property owners.


Here are the benefits of a short sale for a homeowner:

  • Allows the homeowner to avoid a foreclosure
  • Causes less damage to the owner’s credit score than a foreclosure
  • May result in debt forgiveness


Although a short sale may be a better alternative than foreclosure, there are drawbacks to a short sale.

  • Hurts the homeowner’s credit score
  • May cause tax consequences if the debt is forgiven
  • Causes emotional stress
  • Takes longer than traditional real estate transactions

Pros and Cons of a Short Sale for Buyers


Some buyers buy short-sale properties as investments. Here are some benefits of this type of transaction for the buyer.

  • Sells for less than the market value
  • Presents an attractive investment opportunity


Besides competing with other investors, here are some drawbacks of buying a short-sale home.

  • Takes longer to close
  • The lender must approve the offer
  • Often sold in “as-is” condition, so inspections and assessments are recommended

3 Things to Consider Before Buying a Short Sale

Home buyers can have positive experiences buying a short-sale property. However, buyers must go into the process with their eyes wide open. Here are three important things to consider before buying a short sale.

1. The timeline will be slow and unpredictable.

Short sales can take significantly longer to close than traditional real estate transactions, sometimes several months or longer. Buyers should be prepared for a potentially extended waiting period, which may be difficult if they are selling their current home.

2. You may not be getting a great deal.

It’s important to note that many real estate investors focus on short-sale properties. You may have competition for the property, leading to a bidding war.

3. You’ll probably have to buy the house “as is.”

Some short-ale properties are sold “as-is,’ meaning that the buyer will inherit any existing issues or repairs needed without the ability to negotiate for repairs or credits.

Short Sale FAQs

There tends to be a lot of confusion regarding short-sale transactions. Here are a few FAQs about short-sale properties.

Is a short sale good or bad for a buyer?

Sometimes, a buyer can get a good deal on a short-sale transaction, as the lender may be motivated to finalize the transaction. However, short sales are popular with investors, so there may be competing offers.

Why do sellers choose a short sale?

A seller may try to negotiate for a short sale because it is a better option than foreclosure. (However, a short sale can negatively affect a person’s credit rating.) In addition, a homeowner may have their outstanding debt forgiven when pursuing a short sale.

Do agents get paid on short sales?

Yes, agents get paid on short sales. Typically, the payment comes from the lending institution.
You may serve clients facing extreme financial hardships as a real estate agent. Here’s some advice to consider when working with short-sale clients.

  • Educate your clients: Consider sharing this article as a primer on short-sale transactions in real estate.
  • Set realistic expectations: Remind your clients that short sales can take longer and may not always result in the desired outcome.
  • Communicate effectively: Maintain open and transparent communication with your clients throughout the short sale process. Keep them updated on any developments.
  • Provide support and guidance: Offer support and guidance to your clients throughout the emotional and financial challenges of a short sale.

Follow the Colibri Real Estate blog for additional resources on complicated real estate transactions. Colibri Real Estate has been a top-tier real estate education provider for decades, and we are dedicated to the industry. Colibri stays current on licensing and continuing education requirements for all states. Whether you are considering a real estate career and interested in pre-licensing courses or ready to advance your career and earn your broker license, turn to Colibri Real Estate for help.