A short sale can have two main meanings depending on the context:
1. Short Sale in Real Estate
A short sale occurs when a homeowner sells their property for less than the outstanding mortgage balance because they are in financial distress and unable to keep up with mortgage payments. The lender must approve the sale, and the proceeds go to the lender. The lender can either forgive the remaining debt or pursue the homeowner for the deficiency. This process is often used as an alternative to foreclosure and can be less damaging to the homeowner's credit. Short sales typically happen when the home’s market value has dropped below the mortgage amount owed, and the homeowner cannot afford to pay the difference
2. Short Sale in Finance (Stock Market)
A short sale in finance refers to selling a security, such as a stock, that the seller does not own but borrows from a broker, expecting the price to decline. The seller sells the borrowed shares at the current price and later buys them back at a lower price to return to the lender, profiting from the difference. This strategy is risky because if the stock price rises instead of falling, losses can be unlimited. Short selling requires borrowing the stock and is subject to margin requirements and regulatory oversight
Summary
- Real estate short sale: Selling a home for less than the mortgage balance due to financial hardship, with lender approval.
- Financial short sale: Selling borrowed stock anticipating a price drop to buy back cheaper and profit.
Both types involve selling something for less than what is owed or expected, but they apply to different markets and have different mechanics and risks.
