A real estate short sale is a sale of property where the sale price falls short of the balance of the owner's loan on the property. A mortgage lender or bank agrees to reduce a loan's balance if the owner falls into financial or economic hardship. The negotiation of the balance between the owner and the bank is done through the bank's workout or loss mitigation department. The homeowner or debtor sells the mortgaged real estate for less than the loan's current balance and gives the sale's proceeds to the lender, and the lend usually (but not always) considers the debt satisfied. In a short sale, the lender has the right to approve or disapprove the possible sale.
Many factors influence whether or not a bank will allow a short sale, but the two most common are the current state of the real estate market and the financial hardship of the borrower.
Short sales are executed to prevent foreclosure of the mortgaged property. A bank will often agree to a short sale if the bank's fiancial loss from a short sale is less than the financial loss of a foreclosure. Short sales generally occur faster and cost less than a foreclosure. Some of the property owner's advantages in a short sale include a measure of control over the monetary deficiency and a less-impacted credit history.
In short, a short sale is the process of negotiating with lenders for a payoff of less than they are owed. It does not extinguish the balance remaining unless the bank agrees to this in writing. Short sales are common transactions in business; lenders are not doing a favor for debtors, but recognizing that it is not economically feasible to take possession of an asset (in this case, real estate).