In one line: A sale for less than the loan balance, with the lender's consent to take the loss.
A short sale is a conventional sale of a home whose loan balance exceeds what it will sell for, where the lender agrees in advance to accept the proceeds as payoff. The owner submits a hardship package; the lender orders a broker price opinion, decides, and often counters.
It takes 60 to 120 days of the lender's time on top of a normal escrow, and the price lands near market because the lender is choosing between the sale and the auction, not giving the home away. It is a way to buy a specific home cleanly, not cheaply.
For the owner it avoids a foreclosure on their record; for the buyer it is ordinary buying with a slow counterparty. Get the lender's written approval before paying for inspections.
A worked example
Loan balance $410,000, market value $375,000. The owner lists at $375,000, submits a hardship package, and the lender approves a $370,000 sale after 75 days, taking a $40,000 loss instead of the auction.
Questions people ask
How long does a short sale take?
Sixty to 120 days for the lender's approval, then a normal escrow. Two loans on the home mean two approvals. Ask for the approval letter before paying for inspections.
Is a short sale a good deal for the buyer?
Usually a fair one, not a bargain. The lender prices against a broker's opinion of market value and chooses between your offer and the auction. The advantage is a clean conventional sale of a specific home, with the timeline as the cost.