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Jun 08, 2023 PropStream

What’s the Difference Between a Short Sale and Foreclosure?

In 2022, foreclosure rates went up for the first time in over a decade. A recent report by ATTOM revealed that during Q1 of this year, 95,712 U.S. properties underwent a foreclosure proceeding. That’s a 6% increase from the previous quarter and a 22% increase from the previous year.

The recent surge in foreclosures can be attributed to ongoing economic challenges, an uptick in unemployment, and the backlog of foreclosure filings after extended government intervention. Foreclosure moratoriums implemented during the pandemic artificially suppressed foreclosure rates. As they begin to expire, more and more homeowners face foreclosure.

Short sales and foreclosures, although unfortunate events in the lives of homeowners, present opportunities for investors to acquire “distressed” properties at discounted rates. In this article, we’ll discuss the benefits and challenges of each, as well as how to navigate their respective buying processes.

Investing in a Foreclosure Versus a Short Sale Property

The key advantage to investing in a distressed property is the ability to acquire a home at a discounted rate. It’s easy to assume that “distressed” means “fixer-upper,” but that’s not always the case. Distressed properties are simply homes on the brink of foreclosure that need to be sold as quickly as possible to avoid further financial loss.

In either case, the home is being sold at a discounted price for short sales and foreclosures because the owner couldn’t keep up with the mortgage payment. As a result, either the bank or the seller looks for a buyer to take on the mortgage. Given the seller’s financial difficulties, they’re often willing to accept an offer below asking price and negotiate favorable terms on the sale.

Although similar, short sales and foreclosures work differently. In a short sale, the homeowner sells the house for less than the remaining mortgage amount with the lender's permission. This helps the seller avoid the more detrimental impact of foreclosure on their credit report. Foreclosures, on the other hand, occur when the mortgage lender or bank seizes and sells the home.

Short sales involve lengthy, paperwork-intensive processes that can take up to a year to close. Foreclosures tend to happen a bit faster because the previous owner is not directly involved in the sale, the property and the original owner have taken the necessary steps to go foreclosure in their state and the bank is usually eager to recoup as much money as possible.

Short Sales


A short sale, or a quick sale, is when a homeowner decides to sell the property for an amount significantly lower than the mortgage debt. In many cases, homeowners struggling to keep up with their mortgage payments want to avoid foreclosure and often prefer a short sale. As a result, a short sale is sometimes referred to as a pre-foreclosure sale.

It’s important to note that short sale transactions can’t take place without approval from the mortgage company. Before starting the short sale process, the lender must approve a homeowner’s short sale request.

Since the lending institution could incur losses from a short sale, they require supporting documents that justify the need for one and may even suggest a loan modification, instead. To get approved, an owner must prove financial hardship stemming from recent circumstances such as health problems, job loss, or divorce.

After receiving approval from the lender and selling the property, all proceeds from the short sale are directed to the lender. The real estate agent involved in the transaction is aware of this and acknowledges that when a short sale occurs, they may get a different commission than they would in a typical home sale.

The homeowner receives no funds and still bears responsibility for the remaining mortgage balance. It’s not an ideal situation for any homeowner, but it is sometimes necessary. The lender can opt to either forgive the remaining balance or attempt to recover some, or all of the money through a court ruling known as a deficiency judgment, imposed on the homeowner.

Short Sale Process for Buyers

After the lender approves a property for short sale, the home is advertised to the public. Agents can search for short sale properties directly on the MLS. You can put in an offer as you would with any other home. Just keep in mind that the lender reserves the right to reject any or all offers presented depending on their selling goals.

Given the lower price point, financing a short sale property may be easier either through a lending institution or all-cash offer. You’ll go through similar steps as in a traditional sale, but over a longer period of time. While it’s possible to complete a short sale in as little as two months, it's unlikely. It’s best to set an expectation of six months.

Pros of a Short Sale

There are three key advantages to short sales that investors and prospective buyers should consider:

Price advantage: The average short sale property sells at 21% below market value. This provides investors a unique opportunity to acquire real estate that may be in great condition at a discounted price. Investors also enter this type of deal with a lot of bargaining power since sellers are eager to close, so they may be able to negotiate more favorable terms or an even lower price than what is being offered.

Property condition: Since the seller is still involved in the sale and is possibly still living in the home while the short sale is taking place, a short sale property tends to be well-kept. Homeowners typically make an effort to preserve their credit standing, resulting in the likelihood of well-maintained utilities and general upkeep.

Reduced competition: Most buyers on the market are not investors, which means they may not see potential where you might. Many first-time homeowners are willing to pay a higher price for their dream homes or something that’s close to it. As a result, there’s not as much competition for a short sale property as there is for a traditional home.

Cons of a Short Sale

There are three key disadvantages to short sales that investors and prospective buyers should consider:

High risk: Short-sale properties are often sold as-is, with little incentive for the bank or seller to renovate. As a result, they come with a certain level of risk. There’s always the possibility that the existing owner will change their mind about selling, settle the overdue balance, and retain ownership of the home. In this case, any expenses incurred on inspections or due diligence on behalf of the prospective buyer would be lost.

Extended time: The short sale process takes longer than a traditional home sale due to the involvement of multiple lienholders. If the property carries additional liens, they will need to be resolved and approved by the bank or lender before any potential sale could take place. The paperwork and back and forth to resolve lien issues are time-consuming.

More effort: Acquiring a home through a short sale often requires significant additional documentation, meticulous fact-checking, and ongoing communication and coordination with the bank, real estate agents, and related parties. Only some buyers or investors have the willingness to undergo such the demands of a short sale process.



The key difference between short sales and foreclosures is that short sales are voluntary while foreclosures are not. In a judicial foreclosure, the mortgage holder takes legal action to seize the property after the borrower fails to pay a certain number of mortgage payments. In some states, lenders can engage in a nonjudicial foreclosure and take control of the property without getting a court order first. The intent of a foreclosure is for the lender to assume full ownership of the property and then sell it to recover the outstanding mortgage loan.

Unlike a short sale, foreclosures are completely initiated by lenders. The actual foreclosure event, when the lender takes possession of the property, represents the final step in the lender's legal proceedings to assume control of the property and recuperate their investment.

Another difference between the foreclosure process and short sale process is that foreclosures often occur on vacant homes that have been abandoned by defaulting homeowners, known as "zombie foreclosures." If the occupants have yet to vacate the property prior to foreclosure, the lender typically carries out the eviction as part of the foreclosure process.

Once the lender gains access to the property, they order a home appraisal and proceed with the sale. The foreclosure process usually takes less time to complete compared to the short sale process since the lender’s main goal is to liquidate the asset as soon as possible. Foreclosed homes may also be auctioned off through trustee sales, where potential buyers engage in a public bidding process for the properties.

Foreclosure Process for Buyers

Purchasing a foreclosed property isn’t everyone’s cup of tea. Lenders are focused on minimizing their losses and recovering as much of the outstanding balance on the defaulted mortgage as possible. This same objective applies to municipal auctions where properties are sold due to tax liens or other payment discrepancies.

Lenders, banks, and municipalities have no interest in becoming property landlords and as a result, are not as focused on the property itself as much as they are on its mortgage. As a result, zombie foreclosures are sold mostly "as-is" which could mean good, decent or decaying depending on when the house was abandoned.

In most instances, you won’t have the opportunity to conduct a thorough home inspection, which leaves you at a disadvantage as a buyer. This is why due diligence is even more important on a foreclosed property than a traditional home.

Pros of a Foreclosure

There are three key advantages to purchasing a foreclosed home:

Price advantage: Data on foreclosed properties is hard to come by since foreclosures happen sporadically and for a variety of reasons. However, in the third quarter of 2020, the median price of a foreclosed home in the U.S. was just $180,250. At the time the typical home was selling for $281,438, marking a 36% discount on foreclosed homes.

Efficient sale: Due to the typical as-is condition and the likelihood of cash transactions, foreclosed homes tend to be sold quickly and efficiently, resulting in a reduced sale timeline than short sales.

Clear title: Homeowners facing financial constraints may have outstanding back taxes or liens on their property, which gives way for delays during closing. However, when a bank or lender forecloses on a home, they take measures to ensure a clear title for the property.

Cons of a Foreclosure

There are two key disadvantages to purchasing a foreclosed home:

Preference for cash buyers: The preference for cash buyers poses a significant challenge when acquiring a foreclosed home. Prospective buyers are typically required to have a substantial amount of cash readily available for both the home purchase and potential repair expenses.

Poor home condition: When a property reaches the foreclosure stage, it indicates that the homeowner has encountered significant financial difficulties, which often results in neglect of maintenance or even abandonment of the property.

How Often Do Banks Accept Short Sale Offers Over Foreclosures?

Although banks have restrictions as to what justifies a short sale, they generally prefer a quick sale over a foreclosure. Short sales are more cost-effective than foreclosures and make it easier for banks to dispose of "bad debts." According to Moody's Investor Services, losses incurred from foreclosures are 15% higher compared to losses incurred from short sales.

Foreclosures present banks with certain challenges, such as the need to manage unwanted properties and risk selling at a lower price in an uncompetitive market. Banks will always choose to sell as quickly as possible because, as mentioned above, they’re main focus is to recover as much lost funds as possible.

The only time a foreclosure may be more favorable than a short sale is if the bank anticipates a potential appreciation in the housing market.

Identify Distressed Properties With PropStream’s Lead Generation Technology

Finding short sale and foreclosure deals can be a grueling, time-consuming task. A lot of distressed properties go to private auctions before they even hit the public and are often discussed in investors’ inner circles.

Luckily, PropStream’s real estate lead generation software can help savvy investors locate the ideal distressed property for their investments without the need to form a part of private auctions or exclusive investor groups. Using PropStream Pre-Foreclosure quick list can be a great way to get a sense of pending foreclosures and short sales.

Using advanced filtering capabilities, investors can target distressed properties and  make practical use of real estate data—all within one convenient platform. Sign up for a 7-day free trial to find out why real estate agents across the country trust us with their real estate lead generation.

Published by PropStream June 8, 2023