Real Estate Glossary > S > Short Sale Definition

A home that is listed for sale at a price lower than the amount owed on the mortgage. Homeowners hope to sell their home as a short sale to avoid penalties associated with going into foreclosure. What can make it difficult to buy a short sale is that there are often two mortgages on the home and both lenders must approve the sale. The ownership of the mortgages on a short sale home usually belong to more than one party, so you'll likely have to convince multiple banks and lenders to take a loss on their original loan. This is why it often takes so long to approve a short sale offer. If the short sale fails and the homeowner can't afford to pay his mortgage, then the bank forecloses on the home.

Redfin flags listings marked as short sales by the listing agent or through the marketing remarks for a listing. You can exclude these short sales from your search by selecting Exclude short sales from your search options.

However, we are unable to flag listings marked as short sales in the listing's agent-only remarks. So you may not realize that the property you are trying to buy is a short sale. When you schedule a tour to go see homes or submit an offer we'll confirm whether or not the homes you've scheduled are short sales.

Short sale homes are still owned by the home-owner, while foreclosures are owned by banks. If the home-owner cannot sell the home through a short sale, the bank initiates foreclosure to try to sell the home directly, often in an auction. If the auction fails to turn up a buyer willing to pay at least what the bank was owed on the home, the home becomes Real Estate Owned (REO), where the owner is the bank. The bank then typically sells the property through a real estate agent.

1. The customer buys a home and secures a mortgage loan for financing.
2. The customer's mortgage lender then sells the original loan to a secondary mortgage market.
3. That loan gets bundled together with a bunch of others to be sold again as mortgage-backed securities.
4. The ownership of the original loan is now split up among various investors - many of whom are overseas and now possibly bankrupt.

This complicated scenario makes it nearly impossible to figure out who has authority over approving a short payoff on any one mortgage. Loan servicers also complicate the situation: they could care less whether an offer actually goes through and are dealing with thousands of these cases at once.

If you still plan to make an offer on a short sale, be prepared for a long haul. In the meantime, we suggest that you continue touring and considering other homes in case the short sale doesn't go through. Keep in mind that even if your offer is accepted, the banks will usually ask you to buy the home as-is and won't pay for any repairs discovered by an inspection.

To learn more about short sales, here's some helpful information from the recent news and Redfin forums contributors:

• NPR article on hope and frustration buying short sales.
• Seattle Post Intelligencer article on short sale war stories.
• An article on why short sales take so long from Seattle's Rain City Guide.
• North County Times article on why foreclosure might be a better option for short sale owners.
• Redfin forums post on the problems with using VA and FHA loans to finance a short sale.
• Redfin forums post on short sales negotiations.