What defines a “short sale” in real estate?

In real estate, a "short sale" refers to a transaction in which the proceeds from the sale of a property are less than the amount owed on the mortgage. This situation typically arises when a homeowner is facing financial distress and cannot continue making mortgage payments. In a short sale, the lender agrees to accept a reduced payoff amount, allowing the property to be sold for less than the remaining mortgage balance.

This arrangement benefits all parties involved: the seller avoids foreclosure, the lender recovers some of its investment, and the buyer often obtains a property at a lower price. It's important to note that the lender must approve the sale, as they agree to accept a loss on the loan. Understanding this concept is crucial for anyone involved in real estate transactions, especially in markets where homeowners may experience financial challenges.