What is a Short Sale?

Thanks to Attorney Randy Nussbaum of Nussbaum & Gillis, P.C. in Scottsdale for the following information.

A short sale is a sales transaction in which one or more of real property secured creditors permit the conveyance of the property without being pain in full.  A short sale does not by its very nature address whether the underlying indebtedness is being released or satisfied.  Instead, a short sale is separate and apart from the enforcement of the promissory note.

Lenders acquiesce to short sales when they realize that a short sale is the best means to maximize their recovery on the subject property. In most situations involving short sales, the lenders understand that since the property is worth less than the indebtedness encumbering the property, a short sale allows lenders to realize the maximum amount from the sale of the property.  Insightful lenders accept that their other means of recovery on the indebtedness is through foreclosure and, invariably, the amount the lenders net through foreclosure is substantially less than from a short sale.  Therefore, from a lender's perspective, a short sale is a means of making the best of what is oftentimes a very bad state of affairs.

The short sale process:

Even though lenders are modifying their policies (even at the time this article was being drafted), the majority of lenders still follow the same practice.

• First of all, they insist that the Seller present a bona fide offer to it, along with a written explanation from the borrower as to why the short sale should be approved.
• Most lenders request financial information as well, based on the often mistaken belief that a lender should not cooperate if the Seller has the ability to either maintain the loan or cover any shortfall.
• If the lender finds the offer acceptable, it will normally submit an addendum authorizing the short sale, whereas if it does not find the purchase price adequate, it may summarily reject it...  Many lenders are now responding with an amount that the lender would accept as a minimum selling price.

When a short sale is advantageous:

• A short sale is usually better than a foreclosure because with a short sale, the number of months you are late with your mortgage payment is almost always less than if you endure a completed foreclosure... This in itself, is probably better for your credit.
• A short sale is an appropriate vehicle to sell your house if you are not otherwise prejudicing yourself by completing the transaction.  For example, if you are avoiding a foreclosure on your record and are desirous of minimizing your HOA fees, which are a personal obligation separate and apart from the foreclosure, a short sale permits you to terminate future fees because, once you no longer own the property, your obligation on those fees ceases as a matter of law.  In many cases, this could save you hundreds, if not thousands of dollars.
• If the subject loans are recourse obligations and a short sale will reduce your obligation on any shortfall, utilizing a short sale makes sense and could save you tens of thousands of dollars, if not more.

Problems with short sales:

• Does a Short Sale Provide Anti-Deficiency Protection?
• Acknowledgement of a Non-Recourse Debt
• Triggering Tax Liability Where None Existed
• The Seller Loses the Benefit of a Foreclosure

(Note:  I have not included the full explanation of the above and/or an explanation of the "Interplay of Bankruptcy and Short Sales" that were included in Randy Nussbaum's article.  If these topics are important to you, I would suggest that you procure additional information from legal and tax professionals.)


Without question, some short sales are preferable to foreclosures and should be pursued.  Nevertheless, clients who are contemplating short sales need to fully understand the potential risks and pitfalls of doing so.