As foreclosure rates hit record levels, more sellers are turning to short sales as a way to avoid foreclosure. So, how does it work? In a short sale, the seller arranges with their mortgage lender to accept a price that's less than the amount they owe on the property. As part of this arrangement, the lender typically agrees to forgive the rest of the loan. As a result, the seller doesn't have to go though a foreclosure, the buyer picks up a property at a discount, and the lender avoids taking on the burden of unloading the property.

Sounds good right? Well, sellers need to know that a short sale may damage their credit, though probably not as much as a foreclosure. Also, lenders generally will only agree to a short sale if the seller is many payments behind and has received a default notice. Buyers may get a great property at a discount, but they also will need to go through some extra paperwork too. Not to mention, they also need to be prepared to roll up their sleeves if that new property needs fixing up.

Summary: In a short sale, a seller facing potential foreclosure strikes a deal with their lender to accept less than they owe on the property, in exchange for avoiding foreclosure.