Monday, April 28, 2025
We often hear stories about homeowners who got their lenders to agree to a short sale and think, “Wow, they must have really gotten a good deal!” But the reality is a bit more complicated—and not necessarily in the homeowner’s favor.
New New York State Real Estate Law Attorney Anthony A. Nozzolillo, Esq. explained that the concept of a “short sale” is a product of the sub-prime market crash and housing market demise of the late 2000s as a tailored transaction.
“With the changing times, the ‘conventional’ has materialized into the ‘non-conventional’—the same holds true for real estate closings and the underlying fundamentals surrounding some of these real estate transactions,” Nozzolillo explained.
A short sale happens when a homeowner sells their home for less than what they still owe on the mortgage. It usually comes into play when someone is facing financial hardship and can’t keep up with mortgage payments—and there's little to no equity left in the home.
To avoid foreclosure or bankruptcy, the homeowner can work with their lender to sell the property to a new buyer at a lower price. The bank agrees to accept this lower amount instead of going through the costly and time-consuming foreclosure process.
“People are led to believe that by arranging for the lender to accept less than the outstanding balance owed on the loan (from the proceeds of the sale), that they in some way reaped the benefits of a transaction created to cater to the needs of the needy—and silence the commanding voice of these mighty and powerful banks,” Nozzolillo said. “But that’s not exactly the case.”
Foreclosing on a property means the bank has to take over ownership and responsibility for it. That includes maintenance, taxes, and possibly dealing with squatters or vandalism. A short sale helps them avoid all that hassle—so in many ways, it’s the better option for them.
When someone stops making payments, the loan becomes a “non-performing asset” on the lender’s books. That’s bad for business. If the lender agrees to a short sale, they turn that non-performing loan into cash—helping improve their bottom line and potentially boosting their stock value.
On top of that, the difference between what was owed and what they actually receive in the short sale is typically written off as a “loss” for tax purposes. So even though the bank accepts less money, it can still come out ahead financially.
Here’s another thing most people don’t realize: when you pay your mortgage, especially in the first 10 years, most of that money goes toward interest, not the loan balance. That means the bank has likely already made back much of what it lent you—just from your monthly payments alone. So by the time the short sale happens, they’ve probably already profited.
Even if the short sale is approved and the property is sold, you’re not necessarily off the hook. The bank may still sue you for the unpaid amount (called a deficiency judgment), unless they’ve specifically agreed to waive it.
Your credit score will take a hit, although usually not as severe as a foreclosure. And no, you don’t get to “walk away” clean. The impact on your financial future is real—and it can take years to recover.
If you’re approved for a short sale, it may help you avoid foreclosure, but it’s not a free pass. The bank still protects its interests and often comes out ahead. So before you celebrate, make sure you understand what you’re actually agreeing to—and talk to a qualified attorney or financial advisor to fully understand your rights and options.
