In real estate, a short sale is a way for a homeowner to avoid a foreclosure. In both situations, the homeowner is at least several months behind on payments. In a foreclosure, the bank or lending institution seizes the house, and they now own it and have to try to sell it themselves (or through an agency). In a short sale, the homeowner agrees with the bank to sell it for less than it is worth on the market. The banks would maybe agree to this because it means the house will get sold, saving them the selling responsibility. But they are losing money, because the house is selling for less than it is worth. Sometimes, they make the homeowner pay the balance, and sometimes they forgive it.