What is a short sale transaction?

A short sale transaction occurs when a homeowner in financial distress negotiates with their lender to sell the property for less than the amount owed on the mortgage. In this situation, the lender agrees to accept the sale proceeds, even though they fall short of covering the total outstanding loan balance. This arrangement is beneficial for both parties; the seller can avoid foreclosure and the lender can minimize their losses by allowing a sale rather than pursuing lengthy foreclosure proceedings.

The other options do not accurately define a short sale. While pricing below market value can sometimes happen in a short sale (as properties might be sold quickly to attract buyers), it is not a definitive characteristic of the transaction itself. The idea of a seller flipping the property implies a different kind of transaction involving resale rather than a mitigation of losses through a lender's agreement. Lastly, if the lender decides to foreclose the property, that is a completely separate process and does not involve the seller's agreement to sell for less than the owed amount. Thus, the essence of a short sale lies in the lender's acceptance of a lower payoff during the closing process.