What does the term "short sale" refer to?

The term "short sale" specifically refers to a transaction where a property is sold for an amount that is less than the outstanding balance on the mortgage. This typically occurs when the homeowner is facing financial difficulty and can no longer afford to keep the property, but the real estate market conditions have led to a decline in property values. In a short sale, the lender must agree to accept the lesser amount as full payment of the loan, which allows the homeowner to avoid foreclosure and minimizes losses for the lender.

In this context, a short sale is a strategic option for both the homeowner and the bank, as it generally avoids the longer and often more costly foreclosure process. The lender often evaluates the sale for its feasibility and may require documentation of the homeowner's financial situation.

Understanding this definition clarifies the nature of short sales within real estate transactions, distinguishing them from other terms such as foreclosure auctions, which involve properties that have already been repossessed due to non-payment. Additionally, it helps differentiate from sales that involve agreements to meet market value or that deal with properties needing significant repairs.