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Short Sale

The Definitive Short Sale Article

A short sale is an “arrangement” between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. The “deficiency” is the difference between the amount owed and what the bank collects at the short sale.

Although, the “arrangement” can take many different forms, there is no other definition of a short sale. I say this because many realtors and some investors simply throw the term around as if it meant “a sale under market value.” No. A bank owned (foreclosed) house is not a short sale. A seller deciding to lower their price and take less profit is not a short sale. An old lady that owns her home free and clear, selling a $150k home for $75k, IS NOT A SHORT SALE. For it to be a Short Sale, someone must be getting “shorted.” Either the seller, or the bank. I will explain how both of those happen in more detail presently.

Another important definition of a short sale is how it differs from foreclosure. In foreclosure, the homeowner falls way behind on their payments and the bank repossesses the house and sells it. In almost all cases, THE BANK PURSUES THE HOMEOWNER FOR THE DEFICIENCY!!! No one seems to know or believe this, but just ask someone who has gone through foreclosure, they will tell you the only way out of this was to file bankruptcy.

How It Can Happen – The Arrangement

Most short sales arise when a seller owes more on their house than they can sell it for (upside down). The owner of the home then attempts to make an arrangement with their lender to sell the house for less than is owed.

The term “arrangement” was used in the definition and is intentionally broad because the arrangement depends on the bank that holds the loan. Though there are general practices, every bank does it differently. This article will give you the most common arrangements, but if you take part in a short sale, it’s crucial you assume nothing until you have the bank’s policies in writing.

There are some overriding principles:

There is no such thing as a free lunch. This is not some dream come true alternative to foreclosure where the money you owe magically disappears. The deficiency will be accounted for. The deficiency can be 100% loaned to the seller in the form of a promissory note, which they then must repay. If any portion of the deficiency is “written off” meaning that the bank eats it, you can be sure that they will report it as 1099 income to the seller or even as a judgement which will show on your credit for 10 years (not 7 years, 10 years).

It is a cumbersome process. If you are entering into a short sale as a buyer or seller, don’t expect it to go as quickly as any other sale. There’s a lot of “back and forth”.
The employees of the lender that are negotiating the sale ARE NOT there for the benefit of the seller. Their only goal is to collect as much money possible for the lender and they will use whatever means necessary. You can be sure they will misrepresent their own policies and flat out LIE to the seller in order to intimidate and scare them into paying more money. If you think I’m exaggerating, the joke will be on you.

For instance, I was once told by a lender negotiating a short sale that, as a policy, they don’t “write off” any of the deficiency and that the seller would have to have a promissory note for $40,000. This lender also told the seller that their hands were tied and this decision came directly from the investor who provides the money for the lender. The lender also said there is absolutely no negotiation on the amount owed, either pay the deficiency, or they will foreclose. The lender made the promissory note very manageable (20 years 0%) so that the seller would be more enticed to just roll over.

But the seller called the lenders bluff. The seller then provided a letter from an attorney stating they would qualify for a bankruptcy, thus rendering the lender incapable of collecting anything. That same day, the lender called the seller saying they would reduce the promissory note and write off $30,000 of the debt! It would have to be reported as 1099 income, but it would not have to be paid. Amazing change of policy! Then the seller saw what was happening and just said, “no thanks, we don’t want to owe you anything, we’ll just go ahead with the bankruptcy.” Two days later the seller received a written offer that the lender would completely forgive the debt and simply report it as 1099 income! Wow!

The moral of the story is that the lenders will LIE to obtain their money. Many of the managers of the collections departments are paid on COMMISSION on how much they collect. Just imagine if that seller had rolled over on the first offer! That employee would have been responsible for keeping $40,000 of his company’s money with one five minute phone call!

One other important thing to remember is that if the lender gets the property back (i.e. short sale doesn’t go through), they have to put it up for auction. This creates the risk that additional money will be lost if the house doesn’t sell for what it’s worth. In the case of the example, the short sale offer was for $550,000, and the amount owed was $590,000. The seller faxed in evidence to the lender that most similar houses in the area were now selling for $480,000. So this enabled the seller to make the argument that it was a much more prudent risk to write off $40,000 instead of running the risk of losing $110,000. This enabled the seller’s representative to intimidate the employee of the lender asking him “did he really want to be responsible for losing his company $110k, when he had the option, right now, to settle for 40k?”

If it seems like I know a lot about “this example” it would be because I was the mortgage broker for the people making the offer and seller of the property happened to be my wife.

The Details of the Arrangement

Different banks have different policies. The best case scenario is to get a bank that actually “writes off” the deficiency. All that happens here is that the seller has some minor derogatory credit reporting, but doesn’t actually owe the bank any more money. This credit reporting can consist of anything from “creditor settled for less than the amount due” all the way to “foreclosed.”

As the example noted, many banks will do a promissory note for the deficiency.

Some banks are stupid enough to require that the deficiency be paid at closing. Think about it. This does no good because it’s the same thing as the seller selling their house without doing a short sale and simply bringing cash to the table. If a bank tells as seller they need to bring cash to the table in a short sale, they are either idiotic, or more likely LYING.

In cases where the money is “written off” it’s important to understand that the lenders will never actually “write something off.” In most states (I don’t know the law in every state), the lender has the ability to show any deficiency as 1099 income for the seller. All this really means is that the seller has to pay taxes on that income. Depending on one’s situation, it could mean that people that are dependent on some form of aid because of “low income” will have some explaining to do come tax time.

Another way that the deficiency can be written off is in the form of a judgement. This will often occur in conjunction with the 1099 reporting. It might say something on the seller’s credit report such as “judgement filed against John Doe in the amount of $xx,xxx by ABC lender.” This will appear in the “public record” section of the seller’s credit report for 10 years (7 years is only for late payments, 10 years for public record info, don’t argue, trust me). It can either show up as satisfied or unsatisfied. Satisfied is obviously better because it means that the worst thing that can happen is that the lender will report 1099 income.

Unsatisfied could be a problem, because it means that a court has found in favor of the lender to collect the deficiency from you. Now they still might simply do the 1099 thing, or they might try to collect it from you. They can keep trying to collect it from you until they get it. They can garnish your wages. Your only hope then is that you qualify for a chapter 7 bankruptcy.

This brings up an important note. NEVER EVER ASSUME THAT A DEBT THAT YOU OWE A LENDER IS GONE UNLESS YOU HAVE THE DETAILS OF THE RELEASE OF THAT DEBT IN WRITING. For instance, someone who had done a short sale had a first and a second loan. The bank agreed to the short sale, which ended up being enough to pay off the first loan, but not the second. The seller had assumed that because the bank agreed to the short sale that they wouldn’t have to worry about the deficiency from the second mortgage. Now they are surprised that they are being pursued for the deficiency. REMEMBER, the lender(s) will always want ALL their money accounted for somehow. NEVER assume something is written off unless you have a formal, signed, written, unconditional release of lien and/or judgement from the lender specifically stating that no further action to collect this debt will be taken.

How did we get to this place in the first point?

A short sale can come about for many different reasons. In my wife’s case, she was the owner of the house and had been making payments. We bought an investment property and put it solely in her name to protect our family in the event that the market took a turn for the worse. It did. We owed 590k, but the best offer we had after 6 months was 550k.

Despite popular belief, YOU DO NOT HAVE TO BE BEHIND ON YOUR MORTGAGE TO REQUEST A SHORT SALE. You just have to demonstrate that your house can’t be sold for what you owe.

In other cases, short sales happen when a seller can’t afford to make their payments and is nearing foreclosure or bankruptcy. It makes life much more complicated if you are living in the house in question. The bank’s ability to scare you is much greater in that case. In this case, a short sale is only slightly better than the alternatives. You will still lose your house, and your credit is still destroyed just because you’ve made 4-5 late payments on your mortgage.

Despite popular belief, A BANKTUPCY, FORECLOSURE, OR REPOSSESSION DO NOT HURT YOUR CREDIT AS MUCH AS THE MULTITUDE OF LATE PAYMENTS THAT OFTEN LEAD UP TO THEM!!!!! I just cannot stress this enough. People think that a bankruptcy damages their credit beyond repair in and of its own accord. I’ve had many clients file bankruptcy with 750 scores and no late payments only to have their score drop to 680. It’s the clients with 20+ late payments that are having their credit hurt.

A final note on how the short sale can come about… Most banks will not agree to a short sale in writing until you have a formal offer. You can simply call your bank and ask them if you could do a short sale at a certain price and they might say “sure, no problem, we’d be happy to facilitate that offer.” BEWARE. That doesn’t mean a thing. Before your short sale is APPROVED, you’ll have to submit an application, hardship letter, financial statements, tax returns, pay stubs, the purchase agreement from the buyer, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender.

Once this huge packet of information is submitted to the lender, you will most likely hear back in 1-4 weeks on the TERMS of their “approval.” Be warned their approval will most likely be thinly disguised attempt to collect their debt and will almost never be the “write off” you were hoping for.


If you’re an investor, by now, I hope I’ve scared you off. Short sales are not some magic way for you to find properties under market value. They are a tool for sellers that owe too much on their homes to sell them at market value.

What you are looking for (or should be if you’re not) are sellers that owe far far less on their homes than what they’re worth. Sellers who don’t care how much they earn because they’re either desperate or have so many houses they don’t care.

Still if you see a house you want, there is one way that a short sale could come into play. Say there’s a distressed property that you’d pay 100k for that you know would be worth 180k if it was fixed up a bit. The seller doesn’t have the money to do it and the house is either vacant or they want out of their situation. In this case, if the seller happens to owe 130k (around there), and you will only pay 100k, AND the seller hasn’t had any viable offers because of the level of distress on the property, then a short might be just what the doctor ordered.

Don’t be unethical and take advantage of people. You’re only going for short sales if the person WANTS to sell their house and no one else but you will buy it because you’re not afraid to rehab a house that’s smells bad and is falling apart.


Again, a short sale is not a magic cure. It’s also not some mystical solution that only an elite few know about. If you’re curious about selling your house as a short sale, you should contact your lender and get information in writing. It’s usually not easy, and hardly ever will truly “win.” But in some cases, it can leave you much better off than the alternative of foreclosure and bankruptcy. If you’re an investor, there are much better ways to obtain undervalued homes.

Remember that this is a complex process and you should always seek the help of a professional when considering a short sale.


  1. Will I have to pay capital gains taxes if I sell a property as a short sale?
    No. If your bank suggested that, they are ridiculous. Capital gains would indicate that you are in some way “better off” financially because of money you have made. In a short sale, you lose and owe money. The only thing the bank could possibly mean is that the deficiency will be reported as 1099 income and you WILL have to pay taxes on that, but not as capital gains.

  2. We are about to buy a short sale from the bank and are wondering if the bank is responsible for ridding the house of mold or are we?
    First of all, if you are buying a house from the bank, it’s not a short sale. Second of all, in almost every case where there is a bank-owned property, it will be sold AS-IS. Check the verbiage of your purchase agreement with the bank (or seller). Any purchase agreement should contain a clause referencing who is liable for what. If you signed a purchase agreement that didn’t reference the mold or “items required by the home inspection to be completed,” then you will be liable.

  3. If I pay mortgage insurance and default on my loan, why wouldn’t that cover the deficiency amount?
    In some cases it will and in some cases it won’t. It depends on the amount of the deficiency. Usually the mortgage insurance only covers a certain amount. Moreover, the lender will try to collect from you before they file a claim with the mortgage insurance company. The mortgage insurance is not there for your protection, just the lender’s.

  4. We had a first and second loan and went through foreclosure. The first was paid off and we were told the second would be forgiven. Now a collection company is coming after us for the second, what do we do?
    First of all, read this article. The bank will never forgive one dime of debt unless it is explicitly stated in writing and you have it reviewed and confirmed by an attorney. The fact is they probably lied to you verbally. You’re only recourse now is to engage in a legal dispute against them or file bankruptcy.

  5. What are the implications of unpaid judgments?
    Worst case scenario, your wages can be garnished.

  6. How long does the foreclosure process take?
    Complicated question depending on what you consider the start of the “process” to be. Generally, the Bank will send and NOD (notice of default) to the title company and trustee. From that time it takes between 3-9 months for the house to go up for auction, during which, you can pay the delinquent amount to “cure” the foreclosure proceedings.

  7. Will I still have to pay taxes if I do a short sale?
    This is a broad question depending on whether we’re talking about property taxes or federal income taxes. You’ll always have to pay extra income tax if the bank sends you a 1099 for the deficiency. SOMEONE will always have to pay property taxes. Whether its you or the lender depends on their policies and the specific agreement you reach while negotiating the short sale.

  8. I made a loan to a person buying a house as a second mortgage. Now that person is going through foreclosure. Do I have any way of getting paid?
    You Bet! You have just as much right to get paid as the lenders referred to in my article about short sales and you have all the same legal recourses they do. You can write off the loss as 1099 income. You can hire a collection company to obtain the debt. You can file a judgment against them. If they file chapter 7 bankruptcy, there are some cases where you would not get paid, unless the attorney did not include your lien in the bankruptcy. 1099 is the worst case scenario.

  9. I owe more than my home is worth. Am I eligible for short sale or is my only option foreclosure or bankruptcy?
    Always consult your lender as to what your options are. They are usually short sale, deed-in-lieu of foreclosure (basically an accelerated voluntary surrender), and foreclosure. The banks like to prevent foreclosure when at all possible. They’ve even been known to lower people’s rates and payments because of all the new defaults in ’06 and ’07. Either way, your first stop should be to get information from you lender on what options they provide.

  10. Does a good credit score help the seller trying to do the short sale?
    Only inasmuch as their credit score will stay high as long as they don’t make any late payments leading up to the short sale. Some lenders may call the deficiency a judgment though, which will hurt the score a bit.

  11. Where can I get information on investing in short sales and foreclosures?
    First of all, there is no magic listing place for short sales. If a seller has gone to the trouble of asking their lender if they can do a short sale and the lender has given them a verbal approval, then the short sale will show up much the same as any other property for sale, only it will take you five times as long to close it. Foreclosure investing is a whole different ballgame. There are numerous theories, books, websites, and other forms of media, often that charge you for their knowledge. It’s mostly garbage. The only real way to get a leg up in the real estate investing marketplace is to align yourself with other people that are doing the same thing and are successful at it. You have to ask yourself, if there are secrets to making money in foreclosure investing, why would someone give them away?

    Offer yourself as an apprentice to real estate investors. The good ones start to get overloaded and could use the help. Then you have better education than any book or article could ever give you. I could tell you exactly how a client of mine built her net worth by 2 million dollars in two years, but there is no guarantee the same strategy would work for you. Furthermore, if I really do know strategies that allow people to increase their net worth 2 million dollars in one year, I wouldn’t sell my course, or ebook, or whatever for $39.99. I’d charge well over $1000. Bottom line. Learn by doing. Expect mistakes. Try to connect with PEOPLE not with books and articles. Just be sure the people you connect with really are successful. That’s why I suggest the apprentice pitch. No one could afford to hire an apprentice unless they were making enough money to do so.

  12. Is a short sale still an option if a foreclosure has taken place?
    By definition, no. However, if depends what you mean by “taken place” and whether you are the owner or the buyer. If you are the owner and you haven’t been evicted yet, there is always a dollar amount called “cost-to-cure” that, if received by your lender, will cure you default. If you’re a buyer, it’s all the same to you. All you do is make an offer.

  13. How can I get referrals from lenders that have clients wanting to do short sales?
    As an investor, it doesn’t make sense to browse short sales. If the owner has had to ask the lender for approval on a short sale, it’s usually not going to give you a very big equity position if you come in to buy it. Again short sales are usually situations where the owner owes more than the market value. A short sale is not a distressed enough situation to get a good enough deal for an investor. You’re looking for foreclosures, distressed homes, bank-owned properties, etc.

  14. How does a realtor profit from a short sale?
    When formally requesting a short sale commitment from the bank, realtor commissions are usually included if a realtor was involved in the deal. The bank may counteroffer to lower the commissions. Realtors can also “hunt” for short sales by talking to clients that have had their homes listed for a long time with no success. The realtor can explain the short sale process and help the owner negotiate with their lender to get it sold and the realtor gets their commission.

  15. Will I have a higher interest rate on future mortgages or will they be harder to obtain?
    It all depends on the arrangement between you and the lender. If you pay them a promissory note for the deficiency, then the damage to your credit will be minimal and you shouldn’t have a problem obtaining loans in the future. If the lender shows “settled for less than the amount due” on your mortgage tradeline, some future lenders will look at that as a foreclosure. Some lenders even report short sales as foreclosures. Here’s what to do: Obtain, in writing, your lenders policies on short sale credit bureau reporting. Then ask your mortgage broker how that affects your ability to qualify in the future. Generally, when you get a new mortgage, as long as you don’t have a foreclosure, bankruptcy, or unsatisfied judgment, your ability to qualify will be the same as it is now (and your credit score needs to stay the same).

  16. I’m interested in this house, owners divorced and walked away. The bank that holds the second is trying to short sale the house. 2 offers have been placed (500k, 550k). I planned to offer a bit more than the offers, but the realtor called and said the lender (countrywide) will not take any less than the appraised amt that just came in (approx 750k). What next? Does it go to auction? I’m confused why the second mortgage company is doing the short sale and not the primary? Suggestions?
    First of all, if the bank owns it, its not a short sale. Furthermore, if they already own it, chances are it has already been up for auction and they bought it back. Second of all, if the bank says they won’t take less than the appraised value, they are lying. If their lien is only for 620k for example, they would take it in a heartbeat, unless some loss mitigation manager at Countrywide is absolutely convinced that the house will fetch well over appraised value at auction (which it won’t). So make an offer of $560k. Or make an offer of “$10k higher than any other offer up to a s specified amount.” The second mortgage company handles the sale because the first mortgage company will be paid off (most likely) by the sale or auction of the home. If Countrywide doesn’t agree to any offers by a certain time, and it hasn’t already then yes, it goes to auction. The people that bid won’t show up, but a representative from Countrywide will. They will bid what they owe on house. If they already own the house, there won’t be an auction, it has already been foreclosed, and Countrywide will just try to sell it for as much as they can.

  17. I want to do a short sale and have a 2nd mortgage, does this make me ineligible?
    No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then you just negotiate the terms with the second lender.

  18. I have a home that is worth $560,000.00. 1st is $442,000.00, 2nd/HELOC is $130,000.00. Taxes say $10,000.00. Broker fee $10,000.00. Net $540,000.00. $572,000.00 less $540,000.00 $32,000.00 Short. What will happen? Can it happen? What will the 1st lender take and what will the HELOC lender take? Looking forward to your response!
    Yes it can happen. The first lender will be paid off completely and then you and the 2nd lender must make an “arrangement” for the deficiency. Best case scenario is they write off the deficiency and simply report it as 1099 income to you or a satisfied judgment. Read my article on short sales as my own personal example is very similar.

  19. I purchased a new home in February, with a first loan of 80% and a second loan of 20%. I listed my old home with the plan of paying my second loan as soon as the old home sold. This home has been listed for over six months and has not sold and the price has been reduced substantially. I have been paying for mortgages on both homes. I am using my savings and I cannot afford to keep paying both. I cannot afford my new home without paying my second loan. Can I short sell it?
    You and the rest of the country! Yes! You can do a short sale. The problem you face now is time constraints. Talk to the lender on your old house about their options such as deed-in-lieu of foreclosure. Find out what their short sale requirements and policies are.

  20. I have put an offer in on a home that is a short sale. It took months to get a preliminary acceptance from Wells Fargo, but they said it doesn’t have final approval yet. We are 2 weeks from closing and no one from Wells Fargo will call me or my agent back. Any suggestions to get an answer, so I know if my family has a home?
    Great question, and a common problem. It takes a long time for these things to go through usually. You are only two weeks away from closing if Wells Fargo has all their stuff taken care of by then. The only way to get more information is to call the department of Wells that handles short sales and request the information. They probably won’t talk to you unless the seller authorizes you to talk to Wells. When my wife went through a short sale, we called up our lender and authorized the buyers to talk to them. Then our lender gave them all the info they wanted and they buyers were actually able accelerate the process. So ask the appropriate party if the sellers will add you as authorized to discuss the progress of the short sale with Wells Fargo.

  21. Hello, I am interested in purchasing foreclosures for investment reasons. I have been warned of second mortgages being what is foreclosed, not the original mortgage. How can I tell which mortgage is being foreclosed?
    Don’t buy anything until you get a preliminary title report or Lien and Encumbrance report showing who all has a claim to the property. This way you will know who is expecting to be paid off before you can own it.

  22. Does the mortgage company HAVE to 1099 us on our short sale? Is it a law? What is the difference in a 1099 and a 1099A?
    The answer is no, the mortgage company does not HAVE to do anything when you have a short sale. It is very likely however, that they will not simply “charge off” or write off the loss of deficiency money. They can account for this in several different ways, one of the most popular of which being a 1099a.
    1099 is a blanket term used to refer to non-tax-withheld income. A 1099A is likely what the lender will file as it pertains specifically to the acquisition or abandonment of secured property.