How does a "short sale" work in real estate?

In a real estate context, a "short sale" occurs when the lender agrees to accept less than the amount owed on the mortgage. This typically happens when a homeowner is facing financial difficulties and can no longer afford to keep the property, making it unlikely for them to sell it for the full mortgage balance.

During a short sale process, the homeowner lists the property at a competitive market price, and potential buyers may submit offers. Once an acceptable offer is received, the lender must approve the sale since they will not recoup the full amount owed. The lender assesses whether this arrangement is beneficial compared to pursuing foreclosure, which can be lengthy and costly. By allowing a short sale, the lender mitigates losses while the seller is relieved from the mortgage burden.

This choice accurately defines the essential nature of a short sale and highlights the negotiation between homeowner and lender that is key to completing such a transaction. Other options suggest incorrect scenarios that do not reflect how short sales operate in practice, such as listing the property at a higher price or selling the property at auction.