Simply put: a short sale is when the seller of a property owes more on the property than they are selling it for. So if the sellers owe $200,000 on a house, and they are selling it for $150,000, then they are asking the lien holder to take the loss for the difference or the short.
Short sales are very common in this market environment due to decreased valued. Short sales typically take longer than regular transaction because the bank has to approve of the sale. The approval process may be lengthy because the bank may only service the loan, and not actually hold the note. As a servicer, it is their responsibility to handle the transaction for the note holder. However, the note holder must give permission to take the loss. This process can take months.
While the losses on a short sale can be huge, typically the losses are not as bad as they would be if the property went into foreclosure. In a foreclosure situation the property can sit vacant for months, be subject to vandalism, and the cost to foreclose can be very high due to legal fees. However, the servicer will weigh the option of short sale verses letting the property go into foreclosure.