A short sale is when a homeowner cannot sell their home at a price that will pay the liens off against the property. A common type of lien in real estate is a mortgage. When you sell your home, you always have to pay the mortgage company back the money you borrowed from them. If you cannot pay the mortgage back with the sale proceeds, you are considered “short” on your payoff.
An example of this situation is if someone bought a home with financing for $100,000 five years ago. If the homeowner made all their regular scheduled payments over the course of five years, they most likely still owe over $95,000 to the bank. In today’s market that home may now only be worth $60,000. If the owner can only sell their home for $60,000, they would be short paying back what they borrowed by $35,000. If the homeowner cannot come up with the cash difference, the sale would be considered a short sale.
The 2008 economic crisis in the USA is one of the leading causes of short sales due to property devaluation.
Here is the Real Estate Association’s definition of a short sale….
A short sale occurs when (1) a home owner sells their home, (2) the proceeds of the sale are not sufficient to pay off the mortgage liens, and (3) the seller does not have the funds to bring to closing. A successful short-sale transaction includes all lien holders accepting less than what is owed to them.