A short sale is when a person owes more on a piece of real estate, typically a home, than it’s worth.  First the home owner must give a good reason (which may vary depending on the bank)  which typically includes moving, military reasons, loss of job, home loan rate adjusting,  medical reasons to name a few.  Then the homeowner must find a buyer, typically with the help of a realtor, or real estate agent.  They will then submit their financials and the offer to the bank.  The bank will then consider if they will make more by accepting the short sale or by foreclosing on the home. 

     Foreclosure can cost the bank as much as $30,000-$50,000 or more so an offer that is close to fair market value will typically be accepted.  Short Sales can have very extreme tax and credit consequences so you are always advised to speak with an attorney, CPA, and other appropriate professionals before finalizing your decision.  If you are considering a short sale, you may want to look at this article for issues to consider when speaking with your advisors.