Short Sale Definition

What Is a Real Estate Short Sale?

A real estate short sale is when a home is sold for less than its outstanding mortgage balance.

REtipster does not provide tax, investment, or financial advice. Always seek the help of a licensed financial professional before taking action.

An Overview of a Real Estate Short Sale

A real estate short sale is selling a home for a price lower than its current mortgage balance; the difference between the selling price and the mortgage balance is called the “deficiency.”

Financially distressed homeowners or those who cannot keep up with mortgage payments often resort to a short sale.

For example, if Owner C short-sells their home for $200,000 when the remaining mortgage debt is still $250,000, the deficiency is $50,000.

short sale

After the short sale transaction, the lender may either forgive the deficiency or obtain a court-ordered deficiency judgment[1] against the borrower, which forces them to pay the balance to the lender.

There are many reasons why a homeowner would resort to a short sale, but the most common is to avoid foreclosure. In general, when an owner (i.e., a mortgage borrower) cannot keep up with monthly payments for their home, the lender may seize the property. Homeowners may choose to short-sell the property instead of going through foreclosure proceedings.

A short sale process is not limited to residential property. Commercial buildings, vacant land, or any piece of real estate secured by debt can be short-sold. An owner will turn to a short sale to escape the damage to credit caused by foreclosure and, most of the time, ease the financial burden of paying the loan balance[2].

Often used as a last resort for sellers, a short sale may be a gem for investors looking for properties to fix-and-flip.

The Timeline of a Short Sale

A short sale typically happens in this order:

  • A borrower takes out a mortgage to buy a home, with the promise of paying monthly.
  • The borrower (now the homeowner) becomes unable to keep up with the monthly mortgage payment, either due to financial hardship or negligence.
  • The homeowner contacts the mortgage lender to explain their situation and suggests a short sale to avoid foreclosure.
  • After reviewing the situation, the lender agrees to the short sale proposal[3], confirms the price the owner wants to sell it for, and decides what they will do with the deficiency.
  • The property owner lists the property for sale, at a short price they and the lender have agreed upon.
  • A buyer shows interest in the property, and the owner sells it to the buyer, plus fees (if any).
  • The original owner or seller pays the lender the proceeds from the short sale.
  • Depending on what they have agreed on step 4, there are three possibilities:
    • The lender forgives the deficiency;
    • The original owner (seller) pays the deficiency;
    • The original owner (seller) and the buyer split the deficiency payment between themselves and pay the lender.
  • The lender releases their lien on the property, and the buyer becomes the new owner of the home with a free and clear title.

new homeowner

Note that the original property owner cannot initiate a short sale and mortgage payoff if the lender does not agree to it.

Is a Short Sale Taxable?

A short sale can either be taxable or not depending on the sales contract between the lender and the seller.

If the mortgage contract says that the current property owner is liable for the full amount of the loan, then there will be a specific taxable amount based on the remaining balance.

If the contract says otherwise, then the short sale will be exempt from taxes. The lender simply needs to note this debt cancelation on a Form 1099-C to apply this exemption.

Very few short sales are subject to capital gains taxes. Most mortgage lenders will only consent to a short sale if the home’s value is less than the outstanding mortgage balance[4].

Pros and Cons of a Short Sale

A short sale may benefit all three parties in the transaction[5], but there are also risks associated with it.

Here is a breakdown of the pros and cons for each party in the short sale.


For the original property owner (or the seller), a short sale allows them to pay a much smaller loan balance compared to paying all of the remaining debt, even if the lender enforces a deficiency judgment. In addition, a short sale does much less damage to their credit report than going through the foreclosure process.

For the lender, they are going to lose less money with a short sale than with a total foreclosure. The seller, assuming they are successful in short-selling their home, can pay a big portion of the mortgage loan, and depending on the deficiency agreement, may also pay the difference.

investing in preforeclosure

For the buyer, they have just obtained a property for a relatively lower price, making a short sale a haven for real estate investors looking for the most affordable properties on the housing market.


For the original property owner (or the seller), a short sale still hurts their credit score, unless the seller asks the lender (through what’s often called a hardship letter) to list the short sale as “paid in full.” In addition, the seller will come out of the transaction with zero or less profit, which they could have otherwise used to find a new residence.

For the lender, a short sale is typically a lose-lose situation. Either they agree to a short sale or foreclose the property, which will net them less than what the seller owes either way.

Both the seller and the lender will make zero profit. In a realistic sense, they will be selling the house for a lower price. Although the deficiency may still be paid for by either the owner or buyer, both parties will still incur a loss rather than additional income[6].

zombie home fixer-upper

For the buyer, a short-sold home is considered distressed property and usually sold as-is[7]. Logically speaking, if the financially distressed owner was behind their mortgage, they might not have been able to maintain the property in top form. As a result, the buyer may acquire a property that is cheaper than a traditional sale but may turn out to be more expensive in the long run due to repair and rehabilitation costs.

Investing in a Short-Sale Property

Some real estate investors scout properties in distressed status because they are cheaper than buying regular properties at full price.

In general, distressed properties come in several flavors:

  • Foreclosed
  • Pre-foreclosure (short sale)
  • Real estate owned (REO)
  • Tax lien sale

An investor may use the local multiple listing service (MLS) or services like Zillow or Redfin to find distressed properties that fit their investing criteria.

Other than the obvious advantage of buying a property at a steep discount, some types of distressed properties (like an REO) may have favorable financing terms.

“Shorting” Real Estate vs. Short Sale

A similar (and liable to be confused) term is shorting real estate, which is different from a short sale.

shorting stocks

Shorting real estate is a risky investment strategy, similar to shorting stocks. Shorting generally means selling a security that an investor has borrowed, buying it again when the security has fallen in value (thus at a lower price), then returning the security to its owner—with the investor pocketing the difference[8].

One way this is managed in the real estate market is by using real estate investment trusts (REITs)[9], whose shares in real estate are publicly traded like stocks. An investor can sell short individual REIT shares, then buy them back at a lower price when the REIT or its associated market has fallen.


  • A real estate short sale or pre-foreclosure sale is selling a home for a total price lower than the remaining mortgage payoff amount.
  • These distressed sales happen when an owner cannot keep up with mortgage payments and may instead resort to a short sale instead of foreclosure.
  • Short sale transactions cannot take place without the approval of a lender, who stands to lose the most from the situation, whether in foreclosure or a short sale.
  • Some real estate investors invest in short sales to acquire properties at a steep discount, but most short sale properties are sold as-is and may require repairs and rehabilitation to be profitable.


  1. Deficiency Judgment. (n.d.) Legal Information Institute, Cornell Law School. Retrieved from
  2. Crace, M. (2022, December 30.) What Is A Short Sale In Real Estate? A Guide To The Process. Rocket Mortgage. Retrieved from
  3. Westrick D., Lublin, B. (n.d.) The Short Sale Workflow. National Association of Realtors®. Retrieved from
  4. How Short Sales and Foreclosures Affect Your Taxes. (2022, December 1.) Intuit TurboTax. Retrieved from
  5. Hamblin, C., Nelson, T. (2021, March 16.) Short Sale Rules: What You Need To Know. HGTV. Retrieved from
  6. What Is A Short Sale? (2022, December 21.) Ramsey Solutions. Retrieved from
  7. Eberlin, E. (2019, August 20.) 7 Disadvantages Of Buying A Short Sale. The Balance Small Business. Retrieved from
  8. Frankel, M. (2022, July 13.) What Does Shorting A Stock Mean? The Motley Fool. Retrieved from
  9. Morah, C. (2022, May 26.) Is It Possible To Short Sell Real Estate? Investopedia. Retrieved from

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