A short sale is a type of sale in real estate where the sale price of a property is below the balance that is owed on the loan. It is typically a negotiated sale to prevent the homeowner from going into foreclosure and the bank from losing the balance on the property's loan.
In the event that a mortgagor can not meet payment on his/her loan, they can try and sell the property for less than what is owed on the outstanding balance. The lender will approve or disapprove of the sale based on the circumstances of the property, balance on the loan, and sometimes the mortgagor's financial situation. The bank will allow a short sale if they believe that the sale's end result will be less than the home being foreclosed. When a property is foreclosed, there are more costs that the bank will have to take on, so a short sale may be a better financial choice for them to recover the loss. Once the homeowner sells the property the house is out of their hands and they any black marks on their credit associated with being foreclosed on.
There are advantages and disadvantages to a real estate short sale. The advantages include the homeowner avoiding foreclosure, the homebuyer buying a home for a price less than its worth, and the bank for recovering at least some of the loan the borrower used on the property. The disadvantages include the bank taking a loss on the loan and the homeowner having to sell their property.
Short sales can be a very profitable type of sale for a homebuyer if an agreement is met by all three parties. It is a sale that is commonly misunderstood from its name, "short sale," which generally refers to the properties sale under what is owed and not the time period it takes to complete the sale. While short sale can take up to several months to complete, the sale can be very profitable in the end.