What is a Short Sale Anyway?

What Is a Short Sale, and Should You Do One?

Most agents will tell you they handle short sales. Ask them how many they've closed.

That question ends a lot of conversations, and it should. A short sale is not a listing with a lower price on it. It's a negotiation with a bank, sometimes also with a mortgage insurer and an investor behind the loan, and it runs on their timeline with their paperwork and their approval process.

Doing it once every few years is not experience. It's a rehearsal you're paying for.

General educational information, not legal, tax or financial advice.

What it actually is

You sell your house for less than you owe. The proceeds go to your lender, and in return the lender forgives the remaining balance.

It's one way to avoid foreclosure.

The reason it works at all is that lenders lose money on foreclosures. It's expensive, slow, and they end up owning a property they don't want. A short sale usually recovers more of the loan than foreclosure does, which is why they'll consider it.

That doesn't make it easy.

Who has to say yes

More people than you'd think.

Your lender has to agree, and you'll need documentation of genuine financial hardship. Not inconvenience. Hardship, evidenced.

The mortgage insurer, if there's mortgage insurance on the loan, gets input.

The investor behind the mortgage, if the loan was sold, gets input.

Your lender agreeing is not the end of it. Sellers find this out three weeks in, usually from someone who didn't warn them.

Why I use a specialist, and why it costs you nothing

Here's the part I'd most want you to hear.

I don't negotiate short sales myself. I bring in someone who does nothing else.

A short sale negotiator works directly with your mortgage company. They know that lender's process, their forms, who to escalate to, and how long each stage actually takes rather than how long it's supposed to take. They've done hundreds. I've done a fraction of that, and so has almost every agent who tells you they handle it.

My job in that arrangement is what I'm actually good at: getting you the highest possible price and executing the sale. Their job is the bank.

And in my experience, the seller doesn't pay the negotiator. The mortgage company does. The fee comes out of the settlement as part of what the lender approves.

Confirm that for your own situation, because arrangements vary and I'm not going to promise you something I can't guarantee in your specific case. But the general structure is that this expertise doesn't come out of your pocket, which makes the decision to use it a fairly easy one.

An agent who insists on handling the negotiation themselves is choosing to keep control of something they're probably not best at, in a transaction where you have the least room for error.

The case for a short sale

It's usually better than foreclosure. For your credit, for how long the damage lasts, and for what shows up in public record.

You keep some control. You're selling your house, on terms someone negotiated for you, rather than watching it get taken.

It may end the debt. If the lender forgives the shortfall, the obligation can be resolved rather than following you.

No cash out of pocket in most cases. Selling costs typically come out of the proceeds the lender approves.

The case against

It takes longer. Weeks to months for approval, and the timeline is not yours. Buyers walk during that wait, and then you start again.

Many fail. Often over lender demands that show up late. Reducing the broker's commission. Or asking the seller to sign a note agreeing to repay the shortfall, which defeats much of the point.

Your credit still takes damage. Less than foreclosure, generally, but this is not a clean exit.

There may be a tax consequence. Forgiven debt can be treated as taxable income. There have been exclusions for forgiven debt on a principal residence, and the rules have changed repeatedly over the years. Whether one applies to you depends on the year, the property, and your circumstances.

Do not take my word on that last one. Talk to a CPA before you agree to anything. It's the item most likely to produce an unpleasant surprise, and it's the one your agent is least qualified to answer.

How I'd decide

Do you have documented hardship? Job loss, medical, divorce, death, a documented income drop. If you can't evidence it, the lender likely won't approve, and you should know that before you start.

How much time do you have? If foreclosure is weeks away, a short sale may not move fast enough. There are other options at that point and they're worth exploring first.

Are you actually underwater? People assume they are without checking. Get a real valuation before you accept that a short sale is your only path. I've had sellers convinced they owed more than the house was worth who didn't.

Have you looked at everything else? Loan modification, forbearance, a straight sale if there's more equity than you think, a cash sale if speed matters most. I laid the selling paths out side by side in the Smart Selling Options guide.

A short sale is a serious step. It should be the answer after you've ruled things out, not the first thing someone suggests.

What I'd ask any agent before hiring them for this

How many short sales have you closed, and when?

Do you negotiate with the lender yourself, or bring in a specialist?

If a specialist, who pays them?

What happens if my lender demands you cut your commission?

What happens if they ask me to sign a promissory note for the shortfall?

How long does approval typically take with my specific lender?

Vague answers to any of those tell you what you need to know.

If you're facing this

As a Broker Associate serving Prince George's County, Montgomery County, Washington, DC and Northern Virginia, I'll tell you honestly whether a short sale is your best option, connect you with a negotiator who does this full time, and handle the part that gets you the highest price the situation allows.

If you're not actually underwater, I'll tell you that too, and it happens more than you'd expect.

Visit HireConcierge.com to request your Home Wealth Snapshot and seller strategy consultation.

Travell Eiland, Broker Associate, The Concierge Agency. Making Real Estate Dreams Come True.