Short Sale

A short sale is selling a property that is upside down or underwater. This happens when the debt on a home is higher than a buyer is willing to pay. Short sales require bank approval, a process that can take many months and be filled with challenges. So why would a seller want to do a short sale then? There are advantages, which are significant.

3 main advantages

Bankruptcies and foreclosures are the worst thing one could have on their credit report, and thus, should be avoided if possible. A short sale on one’s credit is less severe than having a foreclosure, thus preserving some credit worthiness.
Sellers can receive relocation assistance, sometimes called “cash for keys”. This is money, paid at the completion of the sale, is typically in the $3000-$10,000 range. Although received for in a majority of cases, it is not guaranteed.
Most short sales we complete take between 4 and 8 months from start to finish. Many homeowners live in their homes during this period, thus saving on mortgage payments or otherwise rent.

Short Sale timeline

4-8 months
Short Sale Initiation
  • Hire a REALTOR®
  • Sign Listing Agreement
  • Submit Pre-Short Sale package
  • Prep house for showings
  • List & Show Property
Review Phase
  • Offer negotiation
  • Accept an Offer
  • Submit short sale offer
  • BPO/appraisal ordered
  • Negotiator assigned
  • File with underwriting
Approval & Close
  • Lender counter offers
  • Short Sale approval
  • Perform on Sales Contract
  • Close Escrow
  • Vacate Home

Short Sale FAQ

What is a Short Sale?

A short sale occurs when a property that is underwater, or upside down, is sold.  This means the amount a buyer is willing to pay is less than the debt on the home.  It has negative equity. The bank must approve of the sale (they are taking a loss), and it is not guaranteed.  The process can take many months (our short sales take between 4 and 8 months on average).  The homeowner makes no money from a short sale, but there may be relocation assistance.  It costs nothing for the homeowner to complete a short sale. All fees and commissions are paid for by the bank and/or buyer.  The main advantages to doing a short sale are credit preservation, relocation assistance, and gaining additional time in the home.

Can I get money from doing a short sale? Can I get cash for keys?

Cash for keys, or relocation assistance, is offered by many lenders in short sales, and sometimes in deed in lieu of foreclosure (although deed in lieu is not very common). We apply for the funds during the short sale process and if approved, they are disbursed at the close of escrow. Typical funds are $3000-$10,000.  While we do get relocation assistance for a majority of our clients, it is not guaranteed.

Why should I do a short sale take?

There are three benefits for most homeowners. First, one’s credit is preserved. If in default, allowing the property to foreclose is one of the worst things one could have on their credit report. This remains on one’s credit for 7 years. While the impact of a short sale on one’s credit is still negative, it can be less severe than a foreclosure, and to those viewing a credit report (such as employers, landlords, etc) a short sale appears more forgiving than a foreclosure.


Secondly, money can be received via relocation assistance, or cash for keys.  This is money issued by the bank.  Amounts generally range between $3000-$10,000.  It is applied for by during the sales process and is received at the close of escrow, although it is not guaranteed.


Lastly, time is viewed as a benefit for most homeowners since they choose to live in their homes during the 4-8 months (on average) the short sale takes to complete. This saves them on the mortgage, or rent, they would otherwise be paying.

How long does a short sale take?

The majority of our short sales take between 4 months and 8 months to complete. Our shortest short sale was 4 months and the longest was 2 years.

Why do short sales take so long?

The seller’s mortgage lender needs to thoroughly review a seller’s short sale request. Gathering the required documentation and doing bottom-line reviews can take significant time to complete before a short sale is approved. Also, difficult negotiations that take place between the parties involved, such as junior-lien holders and the seller, may delay the process.  And lastly, the departments handling short sales at the banks are often understaffed, leading to longer timeframes.

What’s involved in a short sale? What’s the process?

Short sales are like regular, traditional sales in that they end with a normal escrow period; however, that escrow cannot begin until the lender has agreed to approve for the short sale.  And that process can involve many steps and many months. The lender usually requires a short sale package to start.  This involves homeowner financial documents, listing agreement, and often a purchase agreement. The lender will review all documents and analyze the offer (usually after an appraisal) and return with a response.  They may accept the current offer and terms, or counter offer.  Each lender can operate a little differently, but everything leads up to a short sale approval.  Once issued, escrow can be opened and the contract instructions can be followed, leading up to a closing.

Do I qualify for a short sale?

First, the home must be upside.  If you have equity than a short sale does not apply (see the Traditional Sale).  In the case of most short sale negotiations, the lender will be looking for a statement of hardship from the homeowners which explains why they need relief and more specifically why the homeowners cannot pay the difference still due on the mortgage after the short sale.  The lender will request financial documents, similar or the same to a loan modification. They want to be assured that the hardship is legitimate.

What is a "financial hardship" and why is it so important?

“Financial hardship” is a critical part of the short sale equation. No matter what you hear about banks “not being in the business of owning real estate,” they do not easily give homeowners a break. They require good reason to give a discount for a short sale.

The only reason a lender will agree to a short sale is if they determine that a short sale will net them more money than proceeding with the foreclosure. Understanding the homeowner’s financial hardship plays a major role in the lender’s estimation of whether or not the mortgage will be paid in full. Lenders may make the borrower pay the shortfall if there is no hardship.

What documents may be required during the short sale process?

The following is typically required for a short sale: Hardship Statement, Statement of Income/Assets,Tax Returns, Appraisal/Comparative Market Analysis, Listing Agreement and Purchase Agreement.

Is a short sale guaranteed?


Why would the bank reject our short sale?

Banks look for different elements to approve a short sale, but perhaps the biggest motivator is whether the bank will make more money by granting a short sale over pursuing foreclosure. Often, the bank won’t disclose these internal discussions.

Who pays the real estate commissions on a short sale?

The commissions are paid from the funds the buyer places in escrow. Since there is no equity in the house, the lender ultimately is the one paying the entire sales commission.

How can we do a short sale with two loans?

You do a short sale with two loans the same way as a short sale with 3 or more loans/liens. Individually negotiate. Typically, the lender in first position will allocate a small percentage of proceeds to junior lienholders. However, borrowers can also be asked to make a seller contribution.

What is going to happen to my credit score?

Selling a property by short sale will cause a hit on the sellers’ credit report and in many cases the affect on credit and FICO scores could be the same as a foreclosure.  However, to many people viewing a credit report, such as a potential landlord,  a short sale is often more forgiving, or appears better, than a foreclosure.  The good news for short sale sellers is that in most circumstances the wait involved before qualifying for a loan to buy another home is much shorter than if a foreclosure occurs.

Is the mortgage lender’s approval necessary in a short sale?

Yes, because in a short sale, the mortgage lender will be receiving less than amount the borrower owes on the mortgage. The lender needs to verify that the homeowner cannot continue to pay the mortgage and determine if a short sale is better than foreclosing on the property.

Can I complete a short sale purchase transaction on my own?

Because of the complex nature of a short sale transaction, it is strongly recommended that buyers work with a real estate professional who has a track record in successful short sales. With the experience and connections, such an agent should be able to identify and help resolve possible hurdles, help put together a viable offer, protect the buyer’s interests, and negotiate the best deal.  Plus, a licensed broker will be required by the bank.

What does short sale approved mean?

Short sale approved is a term that some people in the real estate industry use to describe a short sale the has gone through much of the process (and time), to reach a stage where the bank has accepted a particular price.

Do I have to fix my home for a short sale?

Most homeowners do not spend any extra money or effort improving their homes when doing a short sale.  And why would they? Homeowners make no money from the sale, and it is not required. Sometimes there are home issues that need to be addressed, especially regarding safety and habitability, but if repairs are required they are usually negotiated for the bank or buyer to pay.

Why do short sale homes sell for less than non-short sales?

Homes sold as short sale usually sell for less than traditional sales. Sometimes they sell for slightly less and other times they sell for significantly less.  This is partly due to the fact that buyers must endure a much longer timeframe and uncertainly when buying a short sale, and for that they are compensated with a discount.

Will I be liable for taxes after a short sale?

The difference between the total mortgage debt and the sales price is known as the “deficiency”.  In some states lenders can pursue a deficiency judgment against the debtor, but most foreclosures in California are non-judicial and banks cannot get a deficiency judgment after a nonjudicial foreclosure.  Additionally, California law generally prohibits a deficiency judgment following a short sale of residential homes.


So, the lender cancels the debt, but this canceled debt should be included on IRS taxes. There are a few different ways that homeowners typically resolve this canceled debt as a non-taxable event: insolvency at the time of the short sale, non-recourse loans, and bankruptcy. It is best to consult with a qualified CPA or tax attorney for advice.

What are the pitfalls of buying a short sale property?
  • The short sale process may take more time than a traditional retail sale to complete and it may be difficult to pin down a firm closing date until the seller’s mortgage lender(s) agrees to the short sale. Junior-lien holders such as second mortgages, HELOC lenders and other special assessment liens may also need to approve the short sale. If a buyer is bound by a specific timetable to buy a home, the short sale may not be an ideal route.
  • There are many roadblocks which can derail a short sale. With extra research, a buyer should be able to uncover the possible obstacles and plan for them.
  • Buying the property on an “as is” basis.
  • The seller of the property will normally have to pay some money at closing or agree to an unsecured debt in order to have the short sale approved. If the seller refuses, then a short sale may fall through even if the seller has approved the sale.
  • The approving lender will rarely agree to pay for any extras that a regular seller would normally agree to. This could mean higher closing costs for the buyer.  The buyer will need to shoulder those costs. (For example, the buyer covers the cost for inspections and repairs).