Short Sale vs Foreclosure: Difference and Comparison

Over time, asset sales have changed the inkling of selling, especially in the case of a mortgage, a type of secured loan where one can invest in assets or collateral to avail funds at hand.

Moreover, mortgage lenders play a major in both short sales and Foreclosure, as they are the ones who underwrite financial situations. 

Key Takeaways

1. A short sale is a property sale for less than the amount owed on the mortgage, with the lender’s approval. At the same time, foreclosure is a legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments.
2. A short sale allows the borrower to avoid foreclosure and its negative impact on their credit score, while foreclosure can severely damage the borrower’s credit score.
3. A short sale requires the lender’s approval, while foreclosure does not.

Short Sale vs Foreclosure

A short sale refers to a strategic investment and selling a property for a value less than its original. In investment, short sale risk is higher than in real estate. A foreclosure is a legal action where a lender recovers and sells a property when the borrower fails to make their mortgage payments.

The concept of Short Sale has two explanations; one is a strategic sale in the investment, while the other is selling a property for less than the original value of the property.

This subterfuge investment allows the seller to buy the borrowed shares and resell them before they attains maturity, to buy them later at a lower price than that of the original price. 

On the contrary, Foreclosure is a legal action taken by the lender, who can reclaim the balance loan to pay the due mortgage by selling the borrowers’ assets.

Nevertheless, the borrower is proprietary by default. This type of surrendering property action is carried out only if the borrower fails to repay the mortgage money timely. 

 Comparison Table

Parameters of comparison	Short Sale	Foreclosure
Definition	A short sale has two definitions one is a strategy in the investment, and the other is selling a property for less than the value of the property.	Foreclosure is a legal action when the lender recovers the balance loan from the borrower by selling the asset which the borrower possessed in default to pay the due mortgage.
Etymology	Back in 1609, a shareholder- Isaac Le Maire, did the short-selling of financial security to get profit out of it.	In the 18th century, foreclosure was derived from the Latin word ‘Foras’ that means ‘shut out’ or ‘bar someone from redeeming a mortgage’.
Mechanism	A short sale is made as a trick in investment, where the seller buys borrowed shares and gives them to the broker before maturity to protect the fluctuation of the stock and later buy it back for less money. Besides, a short sale in case of property, where lender accrues sell assets less than the amount of outstanding mortgage.	When the borrower possessing any property with the loan from the lender/mortgagee but fails to repay the mortgagee money, they must surrender the property to the lender, where the lender was forced to sell the asset to redeem his remaining outstanding amount from the borrower.
Risk	As in the case of investment, the Short sale risk is comparatively higher than the real estate. Where risk relies on the price of any asset or security when it comes to augmenting in the value.	Foreclosure is not an easy job, as the sale on the property should be in good shape, the lender should pay addition in case the house is not on good terms, advertise the property to be acquired by someone and hire a real estate agent to sell it at a reasonable price, etc.
Parties involved	Three parties are involved in the short sale of investment or property- the Buyer, broker, and seller.	There are four parties included during foreclosure- the investor, the lender, the servicer (financial institution), and the burrower.

What is Short Sale? 

As mentioned earlier, a short sale is either defined as a strategy in the investment or selling a property for less than the value of the property.

Plus, the selling of assets is not under the hands of the seller but can be taken into consideration when the investor sells it at a lower price. 

Back in 1609, a shareholder of the Dutch East India Company, Isaac Le Maire, was the first one to do the short-selling of financial security in a way to get profit out of it. 

Originally, the short sale concept was introduced as a trick in the field of investment, where the seller buys borrowed shares and gives them to the broker before maturity to protect the fluctuation of the stock.

Eventually, to buy it back for less money than the original. Furthermore, three parties, the buyer, broker, and seller, are incumbent on the short sale of investment or property. 

However, in the case of investment, the Short sale risk is analogously higher than the real estate value. Mostly, the risk depends on the price of any asset or security when it comes to increasing its value. 

What is Foreclosure?

Foreclosure is a legal action carried out by the lender, who wants to recover the balance loan from the borrower by selling or seizing the borrower’s asset in order to pay the due mortgage.

However, it is considered a legal sale only if the borrower fails to repay the mortgage money timely. 

Foreclosure’s origin is unbeknownst. However, In the 18th century, it was affirmed that Foreclosure was derived from the Latin word ‘Foras’, which means ‘shut out’ or ‘bar someone from redeeming a mortgage.

By connecting the Latin meaning, Foreclosure is defined as a process of reclaiming a borrower’s asset or property to accomplish the repayment.

The investor, the lender, the servicer (financial institution), and the borrower are the ones who play the primary roles in the Foreclosure process.  

On the whole, the Foreclosure can be carried out when the borrower with any property fails to repay the mortgagee money, and must surrender the property at stake to the lender.

Ultimately, the lender was either forced to sell or seize the asset to compensate for their remaining considerable amount. 

Foreclosure is a legal as well as risky process, so the property of the borrower should be in good condition.

If not, then the lender should pay additional if the house is not on good terms, advertise the property to be acquired by someone and hire a real estate agent to sell it at a reasonable price. 

Main Differences Between Short Sale and Foreclosure

1. A short sale is a strategy in the investment and a sale of the property at a lower rate than the original value of the property. On the other hand, Foreclosure is the forced sale of an asset or property by the lender if the borrower fails to pay off the mortgage. 
2. A short sale was introduced in 1609 by a shareholder of a company- Issac Le Maire- who sold off his financial security at a low price in the market during its fluctuation and to get it back as a profit if the stock market was favourable. Whereas, Foreclosure was introduced in the 18th century from the Latin word ‘Foras’, which means ‘take away that property if the mortgage is failed to pay. 
3. A short sale works, where the seller sells the stocks to brokers during fluctuations in the stock market and later buys them back for less money, making a profit out of it. Besides, when it comes to property, the lender sells the property without any force to balance its remaining debt with the buyer/borrower. Meanwhile, in case of a foreclosure, the lender is forced to sell the property of the borrower if the borrower is unable to pay his loan. 
4. There is a high risk in short sales, as it depends on the market value of the asset as well as investment. However, the risk of Foreclosure relies on the lender because he/she should incur money to get the property acquired by someone to redeem the borrower’s outstanding loan. 
5. Presuming the short sale includes three parties- The broker, the seller and the buyer. Notwithstanding, Foreclosure involves the parties of- borrower, servicer, lender, and the investor. 

References

1. https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/shortsale-restrictions-and-market-reaction-to-shortinterest-announcements/0F8261074E7271DF396FEE0166B6383F
2. https://academic.oup.com/qje/article-abstract/103/2/345/1827031

Last Updated : 25 August, 2023