What is a Short Sale?
A short sale occurs when a property is sold for less than the outstanding mortgage balance, and the lender agrees to accept the reduced payoff rather than pursuing foreclosure. The term "short" refers to the fact that the sale proceeds fall short of what the borrower owes. For the homeowner, a short sale avoids foreclosure and its severe credit impact. For the lender, it typically recovers more money than a foreclosure auction would, with lower costs.
For investors, short sales represent an opportunity to purchase properties at below-market prices from motivated sellers who owe more than their property is worth. However, short sales are notoriously slow and unpredictable because the lender must approve the sale price, and that approval process can take weeks to months. The deal isn't done when the seller accepts your offer -- it's done when the lender approves it.
How the short sale process works
The seller (homeowner) lists the property for sale, typically with a real estate agent experienced in short sales. A buyer submits an offer. The seller accepts the offer, but instead of proceeding to closing, the offer is submitted to the lender's loss mitigation department for approval. The lender evaluates whether accepting the short payoff makes financial sense compared to foreclosing. This evaluation considers the property's value, the foreclosure costs, the local market conditions, and the borrower's financial situation.
The lender may approve the sale at the offered price, counter with a higher minimum price, or reject the short sale entirely. If approved, the transaction proceeds to closing like a normal sale, except that the seller receives nothing (all proceeds go to the lender) and the remaining unpaid balance may or may not be forgiven. Some lenders pursue a deficiency judgment for the difference; others release the borrower entirely.
Short sale timelines
The biggest frustration with short sales is the timeline. While a normal transaction closes in 30-45 days, short sales often take 3-6 months or longer. The lender review process is the bottleneck. Large banks may have thousands of short sale applications in their pipeline, and each one requires individual review by their loss mitigation team. Delays in document processing, changes in negotiators, and requests for additional information all extend the timeline.
For wholesalers, the extended timeline creates challenges. Your earnest money is tied up for months, and you need an end buyer willing to wait for lender approval. Some investors specialize in short sales specifically because the long timelines discourage competition -- there are fewer bidders willing to wait 6 months for a deal that might not be approved.
Buying short sale properties
Short sale purchases require patience and specific knowledge. The property is typically sold "as-is" with limited or no seller concessions. The lender is already taking a loss and won't agree to pay for repairs, credits, or other buyer requests. Investors who buy short sales must account for repair costs in their offer because there's no negotiating room after lender approval.
Due diligence is critical because you may have limited access to the property before closing. Get whatever inspections you can during the contract period. Review the title carefully -- properties in short sale often have multiple liens, and each lienholder may need to agree to a reduced payoff. Second mortgages, HOA liens, and tax liens can all complicate the transaction.