What is a short sale in real estate?

A short sale in real estate occurs when a property is sold for an amount that is less than the outstanding balance on the mortgage. The lender agrees to accept the proceeds from the sale as full payment of the loan, even though that amount does not cover the total debt. This situation typically arises when the homeowner is unable to keep up with mortgage payments and is facing foreclosure, but they want to avoid that process.

In a short sale scenario, the lender has to approve the sale, understanding that they will receive less than what they are owed. This can be a beneficial option for both the homeowner, who can remove the burden of an unmanageable mortgage, and the lender, who can minimize their losses compared to the lengthy and expensive foreclosure process.

Options that refer to sales resulting in proceeds exceeding the mortgage balance, an auction sale, or a cash-only transaction do not align with the definition of a short sale. A short sale specifically implies a financial loss for the lender, which is why the net proceeds being less than the balance owed is the defining aspect of this transaction.