Foreclosures and Short Sales: What Are They?

For an everyday person looking to buy a home, words like short sale and foreclosure can add even more unknown to the already unfamiliar process of home buying. But passing up a property because it's a short sale or foreclosure means passing up what could potentially be a great investment or your future home. 



This is a word you might have seen plastered on a sign outside that spooky looking house in your neighborhood. And it can surely be scary if you don't understand it. But what does it really mean for a potential buyer? 

Foreclosures happen when a homeowner is so far behind on their mortgage payments that the lender, usually a bank, takes ownership of the property. All foreclosures are owned by a bank and are called REOs which stands for “Real Estate Owned.” It is the bank’s responsibility to sell the home. Foreclosures can be sold at discounted prices, but this is also sometimes not the case. When you buy a foreclosed home, "you assume all liens, IRS liens, and other mortgages possibly tied to the property", according to real estate agent Kevin Sucher via They are also often auctioned off "sight unseen", meaning you buy it without ever seeing what it looks like inside. A buyer may also know very little about the condition of the property. With the possibilities and risks that come with foreclosures, we always advise that you consult with your Realtor before making any decisions. 


Short Sale

When someone realizes that they cannot afford to live in their home due to the cost, they might try to sell it and move somewhere more affordable. But what happens if they cannot get an offer that is enough to pay off their mortgage? That's where short sales come in. 

Short sales occur when a homeowner cannot afford to pay their mortgage, but the bank never assumes ownership of the property. In a short sale, "the property owner owes more on the mortgage than the market value of the property and is asking the bank to accept a short payoff of the loan". In short, the bank takes less than the full payment. This allows the homeowner to walk away with their credit mostly intact. There may be some documentation of the short sale on the homeowner’s credit, but the damage is a far cry from bankruptcy and foreclosure. For the Buyer, they are typically getting a better deal because they are getting a house in better condition than an REO. A short sale can end up with both the homeowner, lender, and buyer happy in the end. 

You may be wondering why a bank would want to allow a short sale, since they will likely lose money. According to Maine Home Connection, banks are only allowed to have a certain amount of money loaned out at once, and when a mortgage isn't being paid, it affects their ability to loan money to others. By accepting a short sale, the bank will receive a portion of their money back and will avoid the fees and costs that come along with foreclosing a property. 

As previously mentioned, you should always consult your Realtor before participating in a foreclosure or short sale transaction. There are Realtors that specialize in these types of transactions that can help you protect your from being taken advantage of.


Zoë Fluet

Zoë Fluet is the Director of Communications at Gray Fox Real Estate.