5 Things You Probably Didn’t Know About “Short Sales” in Real Estate

published Dec 1, 2023
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Rising interest rates and high inflation have some homeowners seeking a short sale to solve financial problems. A short sale occurs when a property sells for less than what homeowners owe the mortgage lender. Homeowners can find themselves on either side of a short sale — as home bargain hunters getting a steal or desperate sellers fighting foreclosure.

But why are there so many short sales happening right now? According to ATTOM, a real estate data firm, foreclosure activity spiked in August 2023. A rise in foreclosure filings leads to more short sales. So if you’ve noticed a bunch of short sales popping up in your home search, you’re not imagining things.

Tina Collazo, a Sarasota, Florida-based Realtor with Keller Williams, is licensed in Florida and Virginia and handled many short sales for buyers and sellers during the housing crisis in 2008–2010. Collazo says although economic conditions are different now, some financial stressors — rising interest rates, soaring home prices — are similar. 

No matter which side you find yourself on, if you’re considering a short sale, the following are five things you probably don’t know — but should. 

Short sales may take a long time.

Ignore the phrase “short sale.” A short sale is a financial and legal process that may take months, even after an initial offer. One difference between buying a foreclosure and a short sale is the sellers need approval from their mortgage lender, who may find reason to turn them down. 

Collazo says sellers need to have a “tight hardship package.” “They have to have a strong reason for the bank to allow them out of the mortgage commitment they’ve made,” Collazo says. “It has to be a distressing situation, like divorce, loss of job, medical issues.”

Additionally, buyers must provide financial documents. “They need to provide bank statements and put together a hardship package complete with a letter to prove they can’t afford the home.” 

Buyers, she says, must go into the process with realistic expectations. “If their lease is ending next month, it’s not realistic to expect that the short sale will be approved and they’ll be moving into their home in a month,” Collazo says. “They would have to start the home-buying process six months out.”

Short sales can impact your credit.

While a short sale could provide financial relief, it could impact your borrowing power. A short sale can hurt your credit. Much depends on how your lender reports the short sale. It will show up on your credit report as “settled,” or it might say the amount legally paid in full. The impact could be a few points or as bad as a foreclosure. 

Not all real estate pros have short-sale experience.

Short sales are a unique home-buying process; not all real estate professionals have experience with these transitions. 

“You want to hire an agent, a title company that’s familiar with short sales or even a short sales negotiator because this way, everybody knows how to navigate and work together because it’s not a traditional transaction,” Collazo says. “The process has to be seamless and tight. That holds the bank accountable to keep moving forward with the process. Because if somebody drops the ball, that’s how a short sale can go out to six or nine months.” 

A short sale impacts your taxes.

During the short sale process, you still have to pay your mortgage and property taxes. You might even have to pay taxes on the loan amount forgiven via the short sale. In some cases, the debt forgiven can be taxable as income. You’ll also have to report any capital gain. Property taxes vary by state, so review federal and local laws for filing requirements. 

Short sales often fall through.

A short sale may sound like a way to get a great deal on a house, but these transactions often fall through. The seller or buyer might not qualify. Because the seller is bailing on a property, the home might not be in the best shape, leaving the buyer with a fixer-upper project they reject. Even if the buyer and seller agree on a price, the lender may refuse an offer it considers too low. “The offer can’t be ridiculous. It has to be within reason or the bank won’t take you serious,” says Collazo.

Remember, short sales can provide a solution for homeowners facing financial hardships or a great deal for homebuyers or real estate investors. Above all, short sales are financial transactions with long-term impacts on the buyers and sellers. Do your research and rely on real estate professionals to avoid potential pitfalls.