The Shrinking of Short Sales

Updated July 2026

A neighbor of mine across the street did it a couple of days ago. He decided to do a short sale.

His action was another reminder (if you needed or wanted another lesson in coping with changing times) to take into account. What he did the other day was even more popular a few years ago when it was a genuine boom to investors, often small-timers, but to homeowners as well.

If you already know this, you have to bear with me. But at its most basic, a short sale is when someone sells their home for less than what they owe on it. Say a mortgage is $300,000, so the home can be sold for $200,000.

Sounds like a bargain, of course. And what’s how many investors viewed it.

The actual process is similar to a regular home sale, though the owner or banker negotiates how much the seller owes after the closing.

My neighbor had the same reasons many others share for selling cheaply. More money than with a foreclosure.

Various bank programs allow sellers to keep thousands of dollars.

Banks and realtors have jumped on this approach and advertise their “exclusive” guides how to profit from it. But individuals have also found this to be a gold mine of opportunities.

But that is changing.

Various studies are showing these short sales so popular just two years ago are now falling significantly. The decline is almost two thirds of that market in some places, according to one study by Lender Processor Services.

Market shares of sold home: also falling.

One of the biggest complaints about them is long delays. It can take years. But software companies have tried to come to the rescue with new programs that speeded up the process.

Too little, too late.

Still, it was not fast enough to overcome a tangle of never-ending new regulations that discouraged some would-be buyers. After all, the longer a property is held in limbo, the longer it takes for holding costs and the chance to see a profit from your investment.

For those investors who relied entirely on bargains such as short sales, and even for the much smaller ones who did it occasionally, is the party over?

Not necessarily.

In some markets, short sales are less expensive than outright foreclosures, according to various studies. An indication of how it is in your particular market: are inventories getting tight, and are there very active large hedge funds running up prices?

Those two factors are only indications, of course, but some states still have active markets in such sales (such as areas in Florida and New Jersey, for example).

If you wonder how my neighbor did, he did fine by his standards. He pocketed $10,000 in cash. But he has other properties. He does not expect the same results with these, however.

One thing he has learned is that if you want to buy or sell in this market, take a close look at changing federal and state regulations governing such sales.

As for you, if you’re reliant on short sales, expect to take a major route detour in the near future as that market is expected to continue to dwindle. Be prepared to wave goodbye to short sales.

The Decline of Short Sales: A Market in Retreat

Short sales were once considered a silver lining in the housing downturn. At their height, they accounted for nearly 40% of all home sales in high-foreclosure states like California, Nevada, and Arizona, according to a 2011 report by the Federal Reserve Bank of San Francisco. But by early 2013, that share had dropped to under 15%, and the trend was accelerating.

What happened? The answer lies in systemic friction. The process, which requires lender approval, credit report reviews, and lien negotiations, is inherently slow. The average timeline from listing to closing now exceeds 14 months, and that’s with streamlined software. For borrowers and real estate agents alike, this is a major deterrent.

Even major institutions like Chase and Bank of America have scaled back their short sale programs. In 2012, the Federal Reserve released a report noting that only 30% of loan modifications were approved within 90 days, and short sales were even slower. Delays led to higher holding costs, reduced buyer interest, and increased risk of foreclosure, defeating the original purpose of the strategy.

Investors with limited capital or time-sensitive goals should avoid short sales. The extended timeline, often beyond 18 months, means holding costs and market uncertainty can erode any potential return. This approach fails when quick turnover or predictable cash flow is essential.

Why the Process Is So Slow: A Closer Look

The core issue is not just time, it’s accountability. Each short sale requires approval from the mortgage servicer, often a third-party entity like Green Tree Servicing or Wells Fargo. These companies operate under strict internal protocols, and decisions are often delayed due to inconsistent staffing, overlapping ownership chains, and regulatory uncertainty.

For example, a 2012 study by the U.S. Government Accountability Office (GAO) found that 78% of short sale applications received no response within 60 days. In some cases, the delay meant the homeowner’s credit suffered, and the property was repossessed anyway. The GAO report noted that state-level inconsistencies, especially between Florida and New Jersey, further complicated nationwide coordination.

Even new software platforms like RealEstateNow and LoanSnap have struggled to reduce processing times below 12 months. Why? Because the bottleneck isn’t technical, it’s procedural. The underwriting standards vary widely across servicers, and the lack of a centralized federal clearinghouse means no single point of truth.

Regulatory Backlash and Market Realignment

By 2013, federal regulators were stepping in. The Consumer Financial Protection Bureau (CFPB) began auditing short sale practices across major banks. Their findings showed widespread delays, inconsistent communication, and a lack of transparency in approval decisions.

As a result, the CFPB issued guidance requiring lenders to respond to short sale requests within 30 days and to provide written explanations for denials. This rule, enforced in late 2012, was a major shift, but it came too late for many homeowners already in foreclosure.

Banks also faced scrutiny from the U.S. Department of Housing and Urban Development (HUD). A 2013 HUD report revealed that short sales were being used as a “backdoor foreclosure” in some cases, with lenders approving sales only after a property had already been repossessed. This undermined the intent of the process and led to reputational damage for the entire system.

Homeowners who already face financial distress and need a swift resolution should not rely on short sales. The process is too slow and unpredictable to prevent eviction or foreclosure in time. Those with imminent default risk are better served by alternatives like loan modification or deed-in-lieu agreements, which can be processed faster.

State-Level Differences: The Florida and New Jersey Exception

Despite the national decline, two states stand out as anomalies: Florida and New Jersey. Both states have active real estate markets and robust regulatory frameworks that support short sales.

In Florida, the state’s Department of Financial Services maintains a public database of short sale approvals, which increases transparency. According to the Florida Housing Finance Corporation, over 18,000 short sales were completed in 2012, up from 13,000 in 2011. The state also offers counseling programs through NeighborWorks America to help homeowners navigate the process.

New Jersey, meanwhile, has a strong legal framework. The New Jersey Department of Banking and Insurance (NJDOBI) recommends that consumers review NAIC materials before considering any life insurance settlement, but also supports short sales as a viable alternative to foreclosure. The state’s Foreclosure Prevention Program has helped over 25,000 homeowners avoid eviction since 2008.

These differences suggest that short sales aren’t dead, just geographically constrained. Investors looking for opportunities must now focus on states with active programs and streamlined approvals. However, even in these states, the process remains high-risk for buyers who cannot afford extended holding periods or uncertain outcomes.

Market Shift: From Bargain Hunting to Strategic Exit

For individual investors, the short sale era was a chance to buy distressed properties at a discount. Platforms like SoFi and Redfin promoted the idea that “undervalued” homes were a surefire path to equity. But by 2013, that market had become saturated.

Today, the best short sales are already snapped up. The average time to list and close a short sale is now 16 months, according to Experian’s 2013 Real Estate Trends Report. That’s too long for most investors, especially those relying on APR or DTI calculations for cash flow planning.

Even large hedge funds are shifting. Firms like Blackstone and Brookfield Asset Management are now focusing on REITs and property renovations rather than short sales. One reason: the cost of holding a property for 18 months, mortgage, taxes, insurance, can reach $5,000–$8,000 for a $200,000 home.

Short sales are not a viable option for investors who depend on rapid asset turnover or need predictable returns. The extended timeline and high uncertainty make this strategy unsuitable for those managing tight budgets or short investment horizons.

Comparative Costs: Short Sale vs. Foreclosure

Frequently Asked Questions

What is a short sale, and how does it differ from foreclosure?

A short sale occurs when a homeowner sells their property for less than the outstanding mortgage balance, with lender approval. Unlike foreclosure, the homeowner retains some control, and funds may be released after closing. Foreclosure, in contrast, is a lender-driven repossession that results in a larger credit hit and no proceeds.

How long does a short sale take to close?

On average, a short sale takes between 14 and 24 months to close. Delays stem from lender approval, credit checks, and legal reviews. The U.S. GAO reported that 78% of applications received no response within 60 days in 2012.

Are short sales still available in 2013?

Yes, but only in limited markets. States like Florida and New Jersey continue to support them through state programs and faster approval processes. Nationwide, short sales have declined by up to 65% since their peak.

Can I still make a profit from short sales in 2013?

Profit is possible but increasingly difficult. With average holding times exceeding 18 months and rising property taxes, the risk of loss is high. The Consumer Financial Protection Bureau (CFPB) has mandated faster responses from lenders, but delays still persist.

Why are lenders slowing down short sale approvals?

Lenders face increased scrutiny from regulators like the CFPB and SEC. In 2013, the SEC’s Life Settlements Task Force examined similar practices and found that inconsistent approvals could lead to fraud or misrepresentation. This has led to tighter internal controls and slower processing.

How do short sales affect my credit score?

Short sales typically reduce your FICO Score by 200–300 points. This is less damaging than a foreclosure, which can lower your score by 250–350 points. The difference may seem small, but it can affect future mortgage eligibility.

What should I do if I’m considering a short sale?

First, consult your lender’s official portal or a HUD-approved housing counselor. The NAIC and NJDOBI recommend reviewing consumer materials before making a decision. Also, consider your long-term financial goals, short sales are no longer a reliable path to quick returns.

Are there any alternatives to short sales?

Yes. Options include loan modification, refinancing, or a deed-in-lieu of foreclosure. The U.S. Department of Housing and Urban Development (HUD) offers programs to help homeowners avoid foreclosure altogether. These may be faster and less damaging than a short sale.

Can I sell my life insurance policy to make money?

Yes, this is called a life settlement. The NAIC provides consumer guidance on the risks, and the SEC has examined regulatory gaps. AARP warns caregivers to be aware of the growing practice, especially for seniors with large policies.

How can I check my credit report before a short sale?

Use the free annual report from Experian, TransUnion, or Equifax. These are the three major credit bureaus. Monitoring your report helps you track how a short sale might affect your FICO Score.