The video above is my sit-down interview with Bill Sokol, a New Jersey attorney whose practice is built around short sales. We got into what a short sale really is, how it's different from foreclosure, and what it actually means whether you're buying one or selling one. If you'd rather read than watch, here's the whole conversation boiled down and brought current for where the rules stand now.
What exactly is a short sale?
A short sale is a sale where the money the house brings in isn't enough to cover the mortgage, the liens, and the closing costs. You've probably heard a house called "underwater" or "upside down." Same thing. The homeowner owes more than the property is worth.
In a normal sale, if you owe more than the house sells for, you write a check at closing to cover the gap. In a short sale, the bank takes that loss instead. The seller doesn't bring a check. They walk away at break even at a moment when they'd otherwise be paying to get out.
Is a short sale the same thing as a foreclosure?
No, and this is the misconception I hear most. They're related, but they're not the same.
Foreclosure is the bank enforcing its rights. The homeowner stops paying, the mortgage company files a legal action, and it heads toward a sheriff sale where the bank recovers what it can. It happens to you.
A short sale is voluntary. It's the homeowner deciding to get out, selling on their own terms and moving on their own timeline. The bank still has to approve the price, but the seller is the one driving. Avoiding foreclosure is one of the biggest reasons people do it.
For buyers
What does that unbelievable short sale price actually mean?
This is where buyers get tripped up. You're scrolling Zillow or Realtor.com, you see a price that looks too good to be true, and sometimes the only clue it's a short sale is a line like "third party approval required." Your instinct is to fire off an offer at that number before someone else does.
Slow down. That list price came from one of two places. Either the listing agent set it based on what they think the house is worth, or the seller's bank gave a suggested number after some early homework. Neither one is a promise. Even a full price offer isn't a done deal.
Every short sale clears two gates. First the seller has to accept your offer and agree it's strong enough to send to their bank. Then the bank has to approve it. The number on the listing is a starting point, not a guarantee.
One thing I can usually tell from the MLS is whether a short sale is approved or unapproved. If it's unapproved, you can more or less ignore the list price. Come in with a fair, strong offer. Not so low you're wasting everyone's time, but a number you can still make money at.
How long does a short sale take?
Every one is different. Different banks, different lenders, and honestly different sellers. Some sellers get you everything you need the day you ask. Others are slow, aren't great with paperwork, and drag their feet.
Most short sales handled by an experienced attorney close in three or four months. If it's dragging past that, something's usually wrong. Somebody isn't cooperating, the loan got sold to a new servicer halfway through, or the file hit a snag. Absent something unusual, plan on a few months, not forever.
Will you get clean title, or inherit the seller's debt?
Be smart and get title insurance, even when you're paying cash. With a mortgage you'll get a lender's policy, but you want an owner's policy too. That's what guarantees you're getting clear and marketable title.
Title insurance is separate from small costs the bank won't cover. It's not unusual in a short sale for a buyer to chip in on minor items the seller can't pay and the seller's bank refuses to. Say there's a $300 water bill standing between everyone and a closing. Most buyers getting a good deal will cover it.
Here's the key. Make sure nothing in your contract forces you to pay those items. Good representation gives you the option to cover a small cost or walk, in writing. You want the choice, not the obligation.
What does "pre-foreclosure" or a lis pendens mean on Zillow?
When Zillow tags a property as pre-foreclosure, it usually means a lis pendens has been filed. That's just a public notice that the property is tied up in litigation. In plain terms, a foreclosure case has started and the complaint's been filed. It's a legal notice, nothing more.
And that price Zillow shows next to it? At that point it's often the Zestimate, which is even further from reality than whatever the listing agent chose. Don't anchor to it.
For sellers
What kind of hardship qualifies you for a short sale?
Life happens. Divorce, job loss, lost overtime, a business that fails, the death of a spouse. These are the hardships that make it hard to keep a primary home, let alone a second one. When someone comes to us about a short sale, they've almost always been through a real financial or life-changing event.
It doesn't have to be catastrophic. I've seen owners who still have their income but got wrecked by an investment property, a tenant who stopped paying, trashed the place, and left. That's a weaker hardship than death or divorce, but it's one we've worked through successfully.
Short sale, foreclosure, or bankruptcy. Which one protects you?
A short sale is usually the most forgiving of the three on your credit, and the easiest to recover from.
The real danger of letting a house go to foreclosure is what's left over. If the home is underwater and it sells at sheriff sale for less than you owe, there's a balance. In New Jersey and Pennsylvania, the mortgage company can sue you for that balance. It's called a deficiency lawsuit. They're not common, but the threat is real, and if it lands on you it's life-changing.
Bankruptcy wipes out the mortgage debt, so it protects you from that deficiency suit. It doesn't get rid of the house. If you've already moved out, you often still need a short sale afterward just to get the property off your hands.
The short sale gives you something the other paths don't. At closing you get it in writing that the bank has forgiven the shortfall and gives up the right to chase you for any balance. That piece of paper is the whole point.
Why use an attorney, and what does it cost you?
Bill's answer here is the one every homeowner should hear. Three reasons.
Time. Most short sales close in four months, but you don't see the work packed into those months. Someone has to be chained to a desk, waiting on the bank, calling when they don't call you, sitting on hold for an hour or more per call. A homeowner should be at work or holding their life together, not doing that. An agent should be selling houses.
Then there's the practical stuff, like the scanners and equipment to send hundreds of pages to a lender, plus knowing how and when to deal with a second mortgage, a HELOC, tax liens, or judgments. Each of those has its own rules. Miss them and the deal dies.
And there's the legal line. The moment a seller asks "should I keep paying my mortgage," "will I owe the bank money," or "will the IRS tax me," those are attorney and accountant questions. An agent answering them, even correctly, is stepping into the unauthorized practice of law and taking on liability. That's not a corner to cut.
Here's the part that surprises people. For the seller, the attorney is free. In a short sale the seller's mortgage company covers the necessary closing costs. That includes the attorney and the real estate commission, which is almost always 6%, plus the real estate taxes and usually the municipal water and sewer. The attorney only gets paid if the deal closes, and it comes from the lender, not from you or the buyer. So the homeowner in the hardest spot gets an experienced firm that's dealt with the big lenders thousands of times, and it doesn't cost them a dime.
Will you owe income tax on the forgiven debt?
This one has changed, so read it carefully and then talk to your own tax professional. I'm not a CPA, and this is the kind of thing you verify before you sign anything.
Start with the general rule. The IRS treats canceled or forgiven debt as income. If a lender forgives $50,000, you can get a 1099-C for that amount, and in principle the IRS expects tax on it. On a mortgage shortfall that number can be large.
For years, homeowners leaned on a federal carve-out called the qualified principal residence indebtedness exclusion, the Mortgage Forgiveness Debt Relief Act, which let you exclude forgiven mortgage debt on your main home. As of 2026 that exclusion has lapsed. It expired at the end of 2025, the 2025 tax package didn't extend it, and a bill to bring it back is still sitting in committee. So don't assume it's there. It may come back, and this is worth re-checking at the time of your sale, but right now you can't count on it.
Two other exclusions are still on the books and do a lot of the work. Bankruptcy is one. Debt canceled in a bankruptcy generally isn't taxable. The bigger one for most people is insolvency. If your total debts are greater than your total assets right before the cancellation, you can exclude the forgiven amount up to the amount you're insolvent. A lot of people doing a short sale are already insolvent, which is exactly why so few ever pay this tax. New Jersey's treatment can differ from the federal rules too, which is one more reason to run your specific numbers past a tax pro.
The honest summary: for most hardship sellers this tax ends up being a non-issue, but the old automatic mortgage exclusion isn't guaranteed anymore, so confirm your situation before you close.
Can you actually walk away with a check?
Sometimes, yes. It's called a relocation incentive. It's the lender's way of thanking you for doing a short sale instead of walking away and leaving them a vacant house to foreclose on and resell.
The amount moves around over the years and it's never guaranteed. When it's paid, it's often around $3,000, and usually only if you're still living in the home at settlement. In a rental market where a typical monthly rent runs well over a thousand dollars, that check can be your first month and deposit into the next place. For someone in a tough spot, getting their debt forgiven and leaving with moving money is about as good as it gets.
Why would the bank ever agree to this?
Because foreclosure is expensive and slow for them too. A New Jersey foreclosure can run a year or more, and during that time the lender is often carrying the taxes, the insurance, and their own legal fees. That's tens of thousands of dollars.
If nobody buys it at sheriff sale, the bank ends up owning it as an REO and has to sell it anyway, with no idea where the market will be by then. Many loans, FHA among them, also carry insurance that reimburses part of the lender's loss. Add it up and liquidating now through a short sale is frequently the better financial move for the bank. That's why they play along.
What are the first steps if you're falling behind?
Call an agent or an attorney first. Not the bank. Whoever you call between me and Bill, we'll loop in the other, because both roles matter. The house has to get listed and sold, and the legal side has to be handled. Line up both before you do anything else.
And do it before you call your own mortgage company. Here's why. If you're still paying and you call to ask for help, they'll often look at your file and tell you to call back when you can't pay anymore. So people default, then call back, then get the runaround, and seven months later they finally reach us buried in missed payments. They'd have been far better off starting with us.
Timing matters at the other end too. I've taken calls where I pull up the sheriff's auction site and the sale is two weeks out. Once a sheriff sale is scheduled and the foreclosure is nearly complete, the bank's incentive to approve a short sale fades and the clock makes it brutal. We don't turn those people away, but the odds drop hard. Earlier is always better.
Last thing worth knowing. Short sales are sold as-is. The seller isn't required to make repairs, and the buyer takes the home in the condition they find it. If a buyer's about to walk over something you can fix and you have the means, fixing it can save the deal. But nobody's forcing repairs on a seller who's already in a bind.
What about reverse mortgages and second liens?
Both are workable. We've done plenty of short sales on reverse mortgages where an owner outlived the loan and can't pay it back. Process is the same as any other. It's paperwork, follow-up, and getting to closing.
Second mortgages, home equity lines, and various judgments are common too, and each has its own procedure for getting settled. Knowing how and when to deal with the second lender, and what they typically accept, is routine for an experienced firm and another planet for a homeowner doing it once. That's the value of having someone who's done this thousands of times.
Common questions about short sales
Does a short sale hurt my credit as much as a foreclosure?
Usually no. A short sale is generally easier on your credit and faster to recover from than a foreclosure or a bankruptcy, which is one of the main reasons to pursue it.
How much does a short sale cost the seller?
In most cases, nothing out of pocket. The seller's mortgage company covers the necessary closing costs, including the attorney, the real estate commission, taxes, and usually water and sewer. The attorney only gets paid at closing, by the lender.
Can the bank still come after me for the balance?
The goal of a properly handled short sale is a written waiver of that deficiency at closing, so the lender gives up the right to pursue the shortfall. That written forgiveness is exactly what a foreclosure doesn't give you.
How long will a short sale take to close?
Most close in three to four months. Longer than that usually means someone isn't cooperating or the loan changed hands mid-process.
Is a short sale property sold as-is?
Yes. The seller isn't obligated to make repairs, and the buyer accepts the home in its current condition. The buyer can still do inspections and walk away if something serious turns up.
What's the very first thing I should do if I'm behind?
Call a real estate agent or a short sale attorney before you call your bank. Getting the right people in place early is the single biggest factor in whether a short sale succeeds.
The bottom line
A short sale isn't a foreclosure and it isn't a last resort you should be ashamed of. For a homeowner with a real hardship and a house that's worth less than the mortgage, it's often the smartest move on the table. You avoid foreclosure, you protect your credit, you can get the balance forgiven in writing, and in many cases it costs you nothing and you leave with relocation money. The catch is that the details are technical and the timing matters, so the right team makes the difference.
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Short sale attorney: Bill Sokol, The Sokol Firm, TheSokolFirm.com, 856-528-2012