A fire sale is the process of selling all assets at a great discount, often due to the seller’s financial distress. The term originally came from the discounted sale of property damaged in a fire. A fire sale is different from a “closeout sale” because it does not necessarily mean that all inventory of the product is reduced to zero.

Fire sales in all markets present a great opportunity for buyers and investors to take advantage of slashed prices that will most likely not drop that low again anytime soon. This is especially true when the potential for long-term value or the opportunity to generate profits off the purchase is strong. Fire sales can be a good opportunity for buyers who wouldn’t have been able to make a purchase unless prices were cut so low.

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In the financial markets, the term describes the situation when stocks or securities trade far below what they are worth often because the company is in financial trouble. This is most commonly seen during bear markets. Sometimes a stock that is sold in a fire sale might be financially healthy, but the sector of that stock is in hot water. Investors who purchase stocks during a fire sale expect them to rise and recover later. If they don’t and the analysis is off, investors risk losing money.

A fire sale is the process of selling a home at a great discount, often due to a seller's financial distress. Credit: Gus Ruballo/Unsplash

A discounted stock price is usually considered a fire sale if it is placed at its lowest price in the past number of years. Most often, an entire sector—such as oil—will experience a fire sale due to bad news, which creates a negative impact on those stocks.

Fire sales can also occur in the real estate market when homes are sold at prices far lower than the market value or than what they were last purchased for in order to attract buyers to make a quick sale. This type of sale most commonly occurs in the event of a major life disruption on behalf of the seller, such as divorce, death of a family member or job loss. These types of deals are often hard to come by because the property is often sold before being officially put on the market. 

In real estate, a fire sale can also be synonymous with the term “short sale” in that the selling price of the property drops 30% to 80% below market value. Short sales are often arranged when the seller is in a distressed financial situation. If the seller has a bank loan mortgage on the property, the selling price is negotiated between the lender and property owner. 

The bank often takes months to sign off on a short sale agreement. As part of this negotiation, the interest rate or length of the loan can also be reduced so the owner can sell the property as fast and as cheaply as possible. The seller can only be free of the property’s debt once the bank approves the sale. If the house fails to sell, the bank requires the seller to pay back the remainder of the debt or risk losing the property.