The main "short sale rule" is SEC Rule 201 (the Alternative Uptick Rule), a circuit breaker that stops short selling at the bid price if a stock drops 10% from the prior day's close, forcing sellers to wait for an "uptick" (selling above the current bid) to limit volatility, though this rule is a modern version of the older, stricter "uptick rule". This rule, part of Regulation SHO, aims to prevent rapid price declines, but it's distinct from real estate short sales.
The elements of a successful short sale are generally these:
The homeowner in a short sale is simply wanting to walk away from their current mortgage and avoid foreclosure. They will receive no proceeds from the sale and, therefore, are not too interested in negotiating any financial terms of the transaction.
In a short sale, the lender typically pays most of the seller's closing costs, including agent commissions, title fees, and taxes, because they are accepting a loss to avoid foreclosure. The buyer is responsible for their own closing costs, but negotiations are key, as the lender must approve all expenses, and sometimes the buyer may negotiate for the lender to cover some costs to get the deal done.
After Short Sale Approval
Buyers may back out based on due diligence, appraisal, or financing at this point, just like any other contract. If it's within the guidelines of the contract, they're free to do so. If it's not, you'll get to keep their earnest money deposit as damages.
In most short sale transactions, the lender (mortgage servicer) pays the real estate commissions, not the homeowner. The commission is typically negotiated and approved as part of the short sale approval process.
The "3-3-3 rule" in real estate isn't a single guideline but refers to different strategies: for buyers, it's about financial readiness (3 months savings, 3 months reserves, 3 property comparisons) or a financial affordability check (30% income, 30% down, 3x income); for agents, it's a marketing habit (call 3, note 3, share 3) or prospecting (talking to everyone within 3 feet). There's also a developer rule (1/3 land, 1/3 build, 1/3 profit), though it's considered outdated by some.
The short seller must later buy the same amount of the asset to return it to the lender. If the market price of the asset has fallen in the meantime, the short seller will have made a profit equal to the difference in price. Conversely, if the price has risen then the short seller will bear a loss.
The 7% sell rule is a stock trading guideline to cut losses quickly, advising you to sell a stock if it drops 7-8% below your purchase price to protect capital, remove emotion, and prevent small losses from becoming catastrophic, a strategy popularized by William O'Neil's CAN SLIM method for growth investing. It assumes that truly strong stocks typically don't fall much below their buy point, so a dip signals something is wrong, requiring you to exit the trade to preserve funds for better opportunities.
DRAWBACKS OF SHORT SALES
No guaranteed closing date. Lender will probably not approve the contract unless it provides for an “as is” sale. Lender will not pay for inspections, repairs, or warranties and often will not pay for standard seller closing costs such as revenue stamps and recording the deed.
Just because a seller accepts a short sale price doesn't mean that the lender will, and the list price may be far below what the lender wants. Banks may reject offers when the price is low, the seller or buyer doesn't qualify, the application is incomplete, or the loan has already been sold.
Sellers typically pay more in total closing costs, often 6% to 10% of the sale price, largely due to real estate agent commissions, while buyers usually pay 2% to 5% for lender fees, title insurance, and other costs, but these amounts are negotiable and vary by location and market. The seller covers the large commission for both agents, while the buyer pays for their mortgage-related expenses, but buyers can ask sellers for "concessions" to help cover their costs.
For a $250,000 home, closing costs typically range from 2% to 5% of the purchase price, meaning you'd pay roughly $5,000 to $12,500, but this varies by location, loan type, and lender, with government loans (FHA/VA) and specific lender fees impacting the final amount, plus prepaid expenses like taxes and insurance.
Typically in a short sale, you must make an offer that is at least at fair market value. If the real estate market has declined, the fair market value may be much less than what the seller initially paid, but the bank has no incentive to go under that amount.
The 80/20 rule (Pareto Principle) in real estate suggests that 80% of results come from 20% of efforts, applying to finding a home (80% fits your needs, 20% are compromises) and for agents/investors (20% of clients/properties yield 80% of income/profit). It's about identifying high-impact activities, focusing on essential needs in a property, and recognizing that a few key assets drive most of the financial success, guiding strategic prioritization for better outcomes.
Buyers can back out before closing, but there may be financial or legal consequences. Contingencies provide legal exits for specific situations. Backing out without cause may result in losing your earnest money deposit.