What defines a short sale in real estate?

A short sale in real estate is defined as a sale where the lender agrees to accept less than the mortgage balance owed by the seller. This typically occurs when the seller is in financial distress and cannot maintain their mortgage payments, leading to an inability to sell the property for the full amount of the loan. In such cases, the homeowner negotiates with the lender to accept a reduced payoff in order to avoid foreclosure. This process benefits both parties; the seller avoids the negative consequences of foreclosure, while the lender may recover some of their investment rather than risk losing everything through a foreclosure process.

This definition clarifies how short sales are a unique solution in real estate transactions, primarily used during challenging financial situations. The other options do not align with this concept. A property sold for more than market value does not relate to the circumstances of a short sale, as it implies a healthy sale wherein the homeowner has equity. Similarly, a transaction where the seller pays off the mortgage does not describe a short sale, as it involves the seller having sufficient funds to fulfill their mortgage obligations. Finally, a sale conducted at auction to the highest bidder typically relates to properties sold through a foreclosure process or other forms of auction, which is distinct from the voluntary process of a short sale.