Short sale facts for kids

A short sale is a special way for a homeowner to sell their house when they owe more money on it than it's currently worth. It's a way to avoid something called a foreclosure, which is when the bank takes back the house because payments haven't been made.

In both a short sale and a foreclosure, the homeowner is usually behind on their house payments. With a foreclosure, the bank takes ownership of the house and has to sell it themselves. But in a short sale, the homeowner works with the bank to sell the house for less than the amount they still owe on their loan. Banks might agree to this because it helps them get some money back and avoids the trouble of selling the house themselves. However, the bank does lose money because the house sells for less than the loan amount. Sometimes, the homeowner might still have to pay back the difference, but other times, the bank might forgive that debt.

Understanding Short Sales

A short sale might sound like a great deal for a buyer, but it's important to understand why they happen. Sometimes, house prices can go up very quickly, creating what's called a "housing bubble." For example, a house that was normally worth $100,000 might suddenly be valued at $200,000. If someone bought it with a loan for $200,000, they would hope to sell it for even more later.

Why Prices Can Drop

However, if the housing bubble bursts, house values can drop. The house that was "valued" at $200,000 might now only be worth $150,000. If the homeowner still owes $200,000, they might try a short sale to sell it for, say, $175,000. This means they would lose $25,000 compared to their loan.

Is a Short Sale a Good Deal?

For a new buyer, even a short sale price of $175,000 for a house that was originally worth $100,000 might still be too high. It's always a good idea to research what similar houses in the area have sold for over time to see the average price. This helps buyers understand the true value of the home.

Images for kids

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  Schematic representation of physical short selling in two steps. The short seller borrows shares and immediately sells them. The short seller then expects the price to decrease, after which the seller can profit by purchasing the shares to return to the lender.

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  Replica of an East Indiaman of the Dutch East India Company/United East India Company, or (VOC).

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  Courtyard of the Amsterdam Stock Exchange (Beurs van Hendrick de Keyser in Dutch)

See also

In Spanish: Posición corta para niños