What is a "short sale" in real estate?

A short sale in real estate refers to a transaction in which a property is sold for less than the amount owed on its mortgage. This process typically requires the approval of the lender, who agrees to accept a reduced payoff to avoid the costs associated with foreclosure. In a short sale situation, the homeowner is usually facing financial hardship and cannot continue making their mortgage payments, so selling the property at a loss, albeit with the lender's consent, becomes a viable option to alleviate their debt.

Understanding the context of a short sale is critical, especially when distinguishing it from other types of property transactions. Unlike a standard sale, where a buyer pays the full market value, or a forced auction from a foreclosure, a short sale is a negotiated process aimed at minimizing financial loss for both the homeowner and the lender involved. The key factor is that the transaction must be approved by the lender, which is not a requirement in traditional sales or foreclosure auctions.