What Is A Short Sale In Real Estate And How Does It Work?

A short sale in real estate is a transaction where the seller of a property agrees to sell it for less than the amount they owe on their mortgage. This type of short sale request is often used when the homeowner has fallen behind on payments and can no longer afford to keep up with them. In these cases, lenders agree to accept less money than what’s owed in order to avoid foreclosure proceedings.

As a New Jersey real estate school, we’ve prepared this article to explain what a short sale in real estate is and how it works. A short sale is when a seller agrees to sell their property for less than the amount owed on their mortgage.

nj real estate school short sale fallen behind on payments

This type of sale is often used when homeowners can no longer afford to keep up with their mortgage payments. While short sales can be a good option for homeowners facing foreclosure, they also come with risks, such as delays, low offers, tax implications, and legal and ethical risks. However, short sales also offer benefits to real estate agents, including expanding market opportunities, preserving clients’ credit scores, reducing commissions, helping homeowners in difficult situations, and improving your reputation as a real estate agent.

How Does a Short Sale Work

Have you ever heard of a short sale? If you’re not familiar, when a short sale occurs a homeowner sells their property for less than as much money is owed on the mortgage. This can happen when the homeowner is facing financial hardship and can no longer afford the monthly mortgage payments.

The homeowner and their lender must agree on the terms of the short sale, including the sale price and any deficiencies that may be owed on remaining mortgage debt after the sale.

Short sales can be a good option for homeowners who are facing foreclosure, as it allows them to avoid the negative impact on their credit score that the foreclosure process can bring. However, short sales can also be a lengthy and complex process, requiring the help of a knowledgeable professional.

Benefits of a Short Sale

Short sales offer new market opportunities

Short sale transactions offer a unique market opportunity for real estate agents to expand their business by targeting clients who may not have been interested in selling their homes before.

Short sales typically come with a variety of challenges for both the seller and buyer, such as obtaining approval from the lender, negotiating with buyers who may not be familiar with the short-sale process, and much more. As a result, agents who are experienced in this area can gain new clients who need expert advice to navigate these difficult transactions.

Short sales can help preserve your client’s credit score

One of the most significant benefits of a short sale is that it offers a more favorable credit score impact for homeowners than a foreclosure. According to studies, homeowners who go through a foreclosure can expect to have their credit score decrease by 200 points or more.

On the other hand, homeowners who participate in a short sale may not see as severe a drop in their credit score, typically between 50 to 150 points. As an agent, helping your clients save their credit score will help improve their financial position in the long run.

Short sales can reduce real estate commissions

In general, short sales have a reputation for taking longer to close and requiring more negotiation and paperwork. As a result, commissions may be lower than in a traditional sale. However, with the right approach and negotiation skills, agents can still earn commissions while offering excellent service to their clients.

By working closely with buyers, sellers, and lenders, real estate agents can streamline the short sale process and increase the likelihood of a successful outcome.

nj short sale mortgage financial trouble

Short sales offer an opportunity to help homeowners in difficult situations

For many homeowners, a short sale can be a lifeline to a better financial future. These transactions can help homeowners avoid the devastating impact of foreclosure, and the long-term financial and emotional stress that comes with it.

As a New Jersey real estate agent, helping homeowners through a short sale can be an incredibly fulfilling experience. You’ll be able to use your skills and expertise to help families move forward with their lives, secure their financial futures, and avoid the emotional and financial stress of foreclosure.

Short sales can improve your reputation as a real estate agent

By helping homeowners avoid foreclosure and guiding buyers through the short sale process, you are establishing yourself as a go-to expert in real estate. Real estate agents who have experience with short sales may stand out among their peers by showing their dedication to their clients’ best interests.

Delivering positive results to clients can lead to more referrals and customer satisfaction ratings that will enhance an agent’s reputation in their community.

Risks Associated with a Short Sale


One of the most significant risks associated with short sales is delays. Homeowners often need to complete paperwork and submit financial information, which can take time. The lender will also likely have to approve the short sale.

The process can take months, and there is no guarantee that the deal will go through. A delay in the process can be frustrating for the homeowner and the real estate agent and can prevent them from moving on and finding a new property.

Low Offers

The purpose of a short sale is to sell the home for less than the outstanding mortgage loan balance. This means that the homeowner might receive low offers, and they may have to consider accepting an offer that is much lower than market value.

Real estate agents need to be prepared to deal with this and to educate the homeowner about the potential range of offers they may receive. Many real estate agents use a comparative market analysis to help homeowners understand the value of their property compared to similar homes in the area.

Tax Implications

Another risk associated with short sales is the potential for tax implications. When the homeowner sells the house for less than the outstanding mortgage balance, the forgiven amount may be considered taxable income by the Internal Revenue Service (IRS).

The impact of this will depend on the amount of the forgiven debt, the homeowner’s income tax bracket, and other factors. Homeowners may need to consult with a tax professional to understand the potential implications.

Legal and Ethical Risks

Finally, real estate agents need to be aware of the legal and ethical risks associated with short sales. These risks include the potential for conflicts of interest, misrepresentation, and errors and omissions. Agents may also face liability if they fail to disclose all material facts or if they engage in any fraudulent or misleading practices.

Mortgage Payment

For those who are considering purchasing a home, short sale properties may seem like an attractive option. However, one question that often comes up is whether or not buying a short sale property will have an impact on your mortgage. The short answer is yes, it can.

When you purchase a short sale property, you are essentially buying a home that is being sold for less than the amount that the current owner owes on their mortgage lender. This means that the bank or lender that holds the mortgage will need to approve the sale, and they may require certain conditions to be met. Additionally, the process of purchasing a short sale property can be more complicated and time-consuming than a traditional sale, which may also impact your mortgage.

It’s important to work with a knowledgeable real estate agent and lender who can help guide you through the process and ensure that you are making the best decision for your specific situation.

How Is The Housing Market Affected

The housing market can be a complex and ever-changing environment, and one factor that can have a significant effect is the occurrence of short sales in real estate. A short sale is essentially the process of selling a property for less than what is owed on the mortgage, and it can have a ripple effect throughout the market.

While short sales can offer a way out for homeowners who are struggling to make their payments, they can also result in lower property values and an influx of new inventory, which can make it more difficult for sellers to stand out. For buyers, short sales can present an opportunity to get into the market at a lower price point, but they may also encounter more competition and a longer, more complicated transaction process.

nj real estate school housing market

Ultimately, the impact of short sales on the housing market will depend on a variety of factors, including the local market conditions and the overall economic climate.

Final Thoughts on Short Sales in Real Estate

In conclusion, short sales can be a great way for real estate agents to help homeowners in difficult situations and establish themselves as go-to experts in the field. However, there are risks associated with these transactions that should not be overlooked.

Agents must consider potential delays, low offers, tax implications, and legal/ethical risks before entering into any short sale transaction. By taking all of these factors into consideration beforehand, agents can ensure they’re providing their clients with the best possible service and advice while protecting their own interests at the same time.

Ready To Begin Your New Jersey Real Estate Career? Enroll Now >

Frequently Asked Questions

Q: What is a hardship letter?

A: A hardship letter is a document written by an individual to explain their financial difficulties and ask for leniency from a creditor. It is a heartfelt appeal that details personal circumstances, such as job loss, medical issues, or unexpected expenses that have made it difficult to pay off debts.

The purpose of a hardship letter is to convince the lender or creditor that the individual is serious about resolving their debts and that a bit of flexibility in payment terms is necessary. Writing a hardship letter can be an emotional and challenging task, but it is a crucial step in managing one’s financial obligations. By taking the time to craft a thoughtful and honest letter, individuals can open the door to new options for financial stability.