A:

The traditional idea of a short sale is selling something you don't have so that you can buy it back at a lower price. The easiest example is stocks. Short sale of a stock involves borrowing stocks from a broker in order to sell them, and when prices fall, buying back the stocks to return to the broker and keeping any profit made. One option that is similar to shorting of a stock is to invest in ETFs that are short in real estate. These ETFs are typically designed to give inverse returns to a pool of real estate investments, usually REITs. By using real estate short ETFs an investor can get similar results to going short in an individual security.

The transaction usually referred to as the "short sale of a house" is the selling of a house that is in the pre-foreclosure state at a price that is less than the amount owed on the house. Houses that are usually short sold are houses in a pre-foreclosure state or houses that are about to be foreclosed upon. Usually, a homeowner short sells a house after notice of foreclosure has been delivered. Before a house can be short sold, the bank needs to be notified and give its approval for the sale.

For more on these options, read Purchasing A Short-Sale Property and our Exchange Traded Funds Special Feature.

This question was answered by Chizoba Morah.


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