Short sale in real estate refers to a sale of a house when the sale price is less than the outstanding mortgage on the property. Short sales occur when the homeowner is in financial trouble and needs the home sold quickly. In order for a short sale to occur, the lending institution must agree to the short sale. Often, lenders agree not to hold the homeowner liable for any outstanding balance, and in some states, lenders are required to waive the outstanding balance. For example, if Savannah sold her home for $150,000 but owed $200,000, the lender would waive the $50,000 if agreed to in the lease.
Short sale also is a type of stock investment where the investor borrows stocks from a broker, sells them to another investor, and hopes to buy the same amount of stocks later for a lower price. Usually, the investor must return the same amount of stocks to the broker at a specific time and for a fee. For example, Tom borrowed 100 stocks of ABC Co. from Tree Frog Lending and sold them for $50 each. Later, Tom sold the stocks for $40 each, and Tom made $1000 minus any fees charged by the broker ($50-$40=$10*100=$1000). Short sales are risky trades because the price must go down for the investor to make anything, and the price could theoretically go upwards indefinitely. For example, if Tom had to return the stocks when the price went to $100, Tom would have lost $5,000 plus broker fees.
[Last updated in July of 2021 by the Wex Definitions Team]