Let’s face it: The housing market is tough right now. Home prices are high, interest rates are up, and many people are finding it harder than ever to afford the house of their dreams. It’s no wonder that many buyers are on the lookout for a good deal.
One way to score a steal is through a short sale—but it’s not as simple as it seems.
There’s a lot to know before you jump in, including the latest scams that have people losing more money than if they had bought a house outright.
What is a short sale?
A short sale happens when a homeowner sells their property for less than what they owe on the mortgage. This typically happens when the homeowner is facing financial hardship, and their lender agrees to let them sell the house for less than the debt to avoid foreclosure.
It’s easy to confuse short sales with foreclosures and auctions, which can occur under similar circumstances, but there’s a clear difference.
- Foreclosure: In a foreclosure, the bank takes over ownership of the property because the homeowner has defaulted on their mortgage. The bank will then sell the house at auction to recoup the loan.
- Auction: This is a public sale, usually held at a courthouse, where the bank or lender tries to sell the property to recover the debt. Bidding is open to the public, and the home is often sold as is. This also usually happens after you’ve defaulted on your mortgage, or failed to pay your property taxes.
While short sales tend to be more common during economic downturns—hitting a high in 2011 and accounting for more than 50% of home sales—they’ve become less frequent in recent years, as the market has rebounded. They still pop up occasionally, especially in areas where homeowners are struggling financially.
How sellers benefit from short sales
If you’re a homeowner who can’t pay your mortgage, turning to a short sale is one of the best options when it comes to salvaging your credit score. While it can still hurt your credit, short sales tend to cause less damage to your financial health than a foreclosure, which can stay on your record for up to seven years.
You’re also allowed to stay in the house while it’s being sold during a short sale, which can offer some valuable stability in a stressful time. There’s also the benefit of privacy. Unlike a foreclosure, where a big foreclosure sign is typically slapped on your front lawn, a short sale can be quieter and less public.
Another big pro is that the bank pays the real estate agent’s commission directly. This is a huge relief if you’re selling your home and don’t have the money to cover those fees yourself.
How buyers benefit from short sales
For buyers, the obvious appeal of a short sale is the potential to snag a great deal and save on the sticker price of a home. These properties can be priced lower than their market value, which sounds like a dream come true, especially in a competitive market. After all, the homeowner is eager to sell their house and usually needs to do so somewhat quickly to keep their financial standing.
However, there are some important caveats to keep in mind when purchasing a short sale home.
The main downside is that the process can be slow and complicated. Since the sale needs the lender’s approval, you’re not dealing with just the seller, but the bank, too. This means a lot more paperwork, waiting, and potentially long delays. If you’re not in a rush and are willing to jump through the hoops, though, the potential savings could make it worthwhile.
Short sales are usually sold as is, which means the home could have some hidden issues. Unlike a traditional sale, you might not get a lot of time to inspect the property or ask the seller to make repairs. It’s up to you to ensure that you’re prepared to take on any potential issues that could arise
Short sale scams to be aware of
With all the benefits, short sales also come with risks, especially when it comes to scams. In recent years, there have been several high-profile cases of short sale fraud, including the infamous “Short Sale Queen” case, where a real estate agent was caught in a scheme where she would forge documents to speed up short sales for buyers, pocketing hefty commissions in the process.
Unfortunately, the increase in real estate scams is something to be mindful of, especially in a market where desperation and financial hardship can sometimes lead people down dark paths.
Expensive upfront fees
Scammers posing as “short sale negotiators,” real estate consultants, or foreclosure specialists might promise to help you navigate the short sale process—but only if you pay them an upfront fee. Once they get the cash, they either vanish or do little to nothing to help.
No legitimate real estate professional or attorney should require upfront fees for helping you with a short sale. Commissions and legal fees are paid at closing.
Sounding too good to be true
Scammers might list a property at an absurdly low price to lure desperate buyers, sometimes using fake listings on Craigslist or social media. Once you bite, they ask for application fees, earnest money deposits, or wire transfers—and then disappear.
Never wire money outside of an official escrow account. If you’re told to “act fast” and skip due diligence, walk away.
Fake buyer offers
Some scammers pose as interested buyers to get access to your financial details or tie up your home in a sham deal. These offers often involve long delays, stalling tactics, or attempts to get the seller to transfer the deed illegally.
Never transfer the title or sign over a deed without proper legal and lender approval. Always involve a licensed agent or real estate attorney.
Flopping
This one’s more complex—and criminal. In a flopping scam, a corrupt seller (or seller working with a complicit agent or investor) intentionally misrepresents the value of the home to the bank.
They persuade the lender to approve a very low sale price and once the lender agrees to the lowball offer (thinking it’s the best they’ll get), the property is sold to an inside party or accomplice—often a friend, relative, or business partner of the seller or listing—who then quickly flips the home at its actual market value for a large profit.
If your agent is discouraging showings or mysteriously turning away interested buyers, they might be involved in a flopping scam.
How to protect yourself
Whether you’re buying or selling, here are a few golden rules:
- Always work with a licensed real estate agent.
- Insist on full transparency. You should be able to see all offers, paperwork, and communication with the lender.
- Verify the credentials of everyone involved, including attorneys, agents, negotiators, and even buyers.
- Report suspicious activity to your local real estate board, the CFPB, or the FTC.
- Take your time. If someone is rushing you to make a decision or to sign documents quickly, whether you’re the buyer or seller in a short sale, take a step back and reassess. Fraudulent schemes often involve pressure tactics.
How to find a short sale
Finding short sales can be a bit trickier than finding regular listings, but it’s not impossible. The best way to get started is to work with a real estate agent—ideally one with short sale or distressed property certifications (e.g., SFR—Short Sales and Foreclosure Resource).
Many agents have specific certifications that show they are qualified to handle these types of transactions, so do your homework and ask around.
While your agent is your best point person, you can try doing some legwork search by looking for short sale homes on your own. Websites like Realtor.com® might have filters for homes in pre-foreclosure, which can be a great starting point. You won’t find every listing, but your agent has access to the multiple listing service and notes for agents and brokers.
