How to Spot a Short Sale That Will Never Close
How do agents know if a short sale is worth taking? Qualify the file before you list it. Check seller engagement, the foreclosure date, who is on title, the loan type, judgments, whether the hardship is real, and any bankruptcy. Most failed short sales were unqualified on day one.
I sat through a three hour short sale CE class taught by a negotiator who has closed over 1,500 of them since 2007. She said her success rate runs about 95%, and then she immediately explained why, and the answer surprised the room.
It is not that she is a better negotiator. It is that she says no.
Her words, roughly: part of my success rate is because I teach agents what a good short sale looks like and what a bad file looks like, so you are not taking listings that will never close.
That reframed the whole thing for me. Agents lose money on short sales long before they ever talk to a bank. They lose it at the listing appointment, by saying yes to a file that had a fatal problem sitting in plain sight.
So here is the qualification checklist, in the order I would run it.
1. Is the Seller Actually Engaged?
This is number one and nothing else is close.
A short sale generates an absurd amount of paperwork. When the bank asks for a document, you need it back in 24 to 48 hours or the file stalls. That works only if your seller picks up the phone.
The failure mode described in that class was vivid: agents driving to the property and sitting on the front porch trying to get a signature from a seller who had checked out.
Two specific red flags:
"Sell it if you can, but I'm foreclosing in two months and I don't really care." That is not a client. That is a person who has already made peace with foreclosure.
A divorce where one party is going quiet on purpose. This is the big one right now, because divorce is the most common hardship showing up in Colorado short sales at the moment. If both names are on the loan, both have to sign. A spouse who is being vindictive can kill your deal on their own, for free, from their couch.
Have the direct conversation at the listing appointment. Something like: I am not going to spend my time and my money listing this if you are not going to be responsive and get me documents signed. Are you both in?
If either one hesitates, believe them.
2. How Close Is the Foreclosure Date?
Ask two questions: has a Notice of Election and Demand been filed, and what is the sale date?
Under 30 days out, pass. FHA in particular gets difficult if there is no offer at least 37 days before the sale date, and there is a real sequence of events that has to happen first. Getting the authorization letter to the bank takes days. Then you need a contract. Then they order a value. That does not fit in three weeks.
Has it been done in seven days? Yes, but the example given was somebody's close personal friend, where the negotiator was willing to spend every waking hour on the phone. That is not a business model.
There is a middle path. Tell the seller to call the bank and ask for an extension on the sale date. If they get one, you have runway and you can list it. If they do not, you were right to pass.
This is also why the NED list is such a good source. Someone who just landed on it has roughly three months, which is exactly the runway you want.
3. Who Is Actually on Title?
Pull an Owners and Encumbrances report before you do anything else. Not after you list. Before.
The classic Colorado situation looks like this. Couple divorces while upside down. The attorney has no idea what to do because there is no equity to divide. She is staying in the house, he is leaving, she cannot refinance because the home is underwater. So the attorney does the only thing available and quit claims him off title.
Now she is the only one on title. Both of them are still on the loan.
For a short sale, both have to participate, because you are negotiating with the lender and the lender's contract is the note, not the deed. Match who is on title against who is on the mortgage statement and get a clear picture of exactly whose signature you need before you commit.
I pull O and E reports for agents across Denver Metro all the time, and on a potential short sale it is the highest value five minutes you will spend. It answers questions 3, 4, and 5 on this list at once.
4. What Kind of Loan Is It?
Ask the seller. Then verify.
FHA loans carry a stamp right on the O and E. You can often confirm from the mortgage statement as well.
This matters because different programs demand different nets off the appraised value, and the government programs have published rules you can actually plan around. FHA has a pre foreclosure program with an Approval to Participate letter that spells out exactly what they will take. Conventional is more of a case by case negotiation, and conventional lenders are the ones more likely to ask the seller for a cash contribution.
FHA is the most common short sale type showing up right now, which makes sense. Those buyers put 3.5% down, and it costs 8 to 10% to sell. They were underwater the day they closed.
5. How Many Judgments Are Attached?
This is the one where I see agents guess, and there is no clean numeric rule. It is about what kind of lien, not how many.
Here is the logic. The first mortgage is the one taking the loss and the one that would end up owning the property in a foreclosure. So the first decides what, if anything, gets paid to everyone behind it, and they are stingy.
Second and third mortgages usually settle. They know a foreclosure wipes them out entirely, so $1,500 or $3,000 beats zero. These are negotiable.
Personal judgments usually do not. If someone wrecked an uninsured car, stopped paying the loan, and the lender attached a judgment to the house, that creditor can still pursue the borrower personally after the sale. So they have no reason to release a $40,000 claim for $1,500.
Real examples from that class: a car attached to a house. A boat attached to a house.
My rule of thumb from this: more than one personal judgment and I would pass. One is workable. Two or more and the math stops closing.
Two other things you will see on the O and E:
Tax liens are not a disqualifier, but the seller has to do the work. Neither you nor a coordinator can contact the IRS on their behalf. The seller calls their IRS representative, shows the settlement statement proving they receive nothing from the sale, and the IRS will typically release the lien from the property while continuing to pursue the person. Ask the seller up front whether they are willing to make that call.
Lis pendens means there is a court case attached, and assets are frozen. You cannot sell through it. The good news is they also cannot foreclose through it. Stay in touch and revisit when it clears.
6. Is the Hardship Real?
Losing value is not a hardship.
A lot of people right now are saying some version of: my house dropped $50,000, I do not want to bring $50,000 to closing, so I want to do a short sale. If they are earning the same money and nothing has changed in their life, that does not qualify. A short sale is for financial distress, not for a bad entry price.
What does qualify:
Divorce
Loss of employment, or a new job at significantly lower pay
Death
Serious illness
The cleanest test anyone gave me all morning is the financial worksheet. Have them list income and every real expense. If the bottom line is negative, you have a hardship. If they clear $2,000 a month, you do not.
One nuance worth knowing: people fill these out lazily. They put the mortgage, the car, and groceries, and stop. That understates the picture and makes a legitimate hardship look like it is not one. Do not have them exaggerate, because the bank is going to see pay stubs and bank statements. Just have them list everything.
On investment properties: possible, but harder. The bank looks at the borrower's whole financial position, not one address. Someone with two rentals who lost their job and is fighting to keep their own home can qualify. Someone with a portfolio throwing off income who has one vacancy generally will not.
7. Is There a Bankruptcy?
Not a dealbreaker. But you need to know exactly where it sits, because each stage has a different next step.
Thinking about filing. Sometimes the best sequence is to complete the short sale first and then file, so it all rolls together. That is a conversation for their attorney, not for you. Some people are in bad enough shape that they need to file immediately, and you never want to be the person who told them to wait.
In the middle of it. Assets are frozen. The bankruptcy attorney can file what is called an order of abandonment, which sends the settlement statement to the judge showing the seller nets nothing and asks permission to let the sale proceed. This is extra work outside the attorney's flat fee, so expect them to want to be paid for it.
Discharged. Confirm it is fully discharged. The common pattern: someone kept the house in the bankruptcy thinking that clearing other debt would make it affordable, then a year later realized it still is not.
The thing to screen for in all three cases is a cooperative attorney. Bankruptcy attorneys work on a small flat fee to file specific paperwork. They are not incentivized to do extra work, and plenty of them do not understand why a short sale matters when the debt is being discharged anyway.
The argument that works with them: after the bankruptcy finishes, the house still goes through the entire foreclosure process. Now the client has a bankruptcy and, a year later, a foreclosure on their record. A short sale during or around the bankruptcy avoids the second hit and lets them start rebuilding sooner.
One more thing here, and it is a business development note. If you can explain that to a bankruptcy attorney clearly, they become a referral source. Most agents never have that conversation.
The Short Version
Before you sign a listing agreement on a short sale, you should be able to answer all seven:
Is the seller, and every party on the loan, actually engaged?
Is the foreclosure date more than 30 days out?
Who is on title, and does it match who is on the loan?
What loan type is it?
How many judgments, and are any of them personal?
Does a financial worksheet come out negative?
Where does any bankruptcy stand, and is the attorney cooperative?
If you cannot answer one of these, you do not have enough information to decide yet. Get the O and E, have the conversation, and then decide.
Saying no to the wrong file is not being unhelpful to the seller. It is being honest with them about a process that was going to fail anyway, six months from now, after they had gotten their hopes up.
Frequently Asked Questions
Can you do a short sale on an investment property in Colorado?
Yes, but it is harder to qualify. The lender evaluates the borrower's entire financial picture, not just the one property. An owner with one or two rentals who has lost their income can qualify. An investor with a portfolio producing enough income to cover the property generally will not.
Do tax liens stop a short sale?
No, but they add a step and the seller has to take it. The seller contacts their IRS representative and provides the settlement statement showing they receive no proceeds. The IRS will typically release the lien from the property while continuing to pursue the debt personally.
How many liens are too many on a short sale?
There is no fixed number. What matters is the type. Junior mortgages usually settle for a small amount because a foreclosure would wipe them out. Personal judgments, like a car or boat loan attached to the house, usually will not settle, because that creditor can still pursue the borrower after closing. More than one personal judgment is a good reason to pass.
What is the minimum time before a foreclosure sale date to take a short sale?
Roughly 30 days as a floor, and more is much better. FHA becomes difficult without an offer at least 37 days out. The NED list is useful precisely because it surfaces homeowners about three months before their sale date.
This post is one part of a larger series I put together from that class. The full walkthrough is here: Short Sales in Colorado: The Complete Guide for Real Estate Agents.
If you want an O and E pulled on a file you are considering, or the NED list for an area you farm, reach out. Chicago Title of Colorado handles both, and I would rather help you qualify a file in ten minutes than watch you spend six months on one that was never going to close.
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This content is for general informational and educational purposes only. It reflects my personal opinions and industry experience and is not legal, financial, or tax advice. Real estate laws, lender programs, and market conditions change frequently, so verify independently and direct your clients to the appropriate licensed professional before making decisions.
Jerad Larkin The Mile High Title Guy Account Executive, Chicago Title of Colorado 303.630.9430 | Info@MileHighTitleGuy.com milehightitleguy.com
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