The sale of real estate in which the proceeds from selling the property will fall short of the balance secured by liens against the property, and the property owner cannot afford to repay the lien holder. When a short sale is presented to the lender, it requires the cooperation of all the parties in the transaction. When all the parties agree to a short pay off, that's when a short sale can be completed. Lenders normally have restrictions on any closing costs, repairs and commission that is paid by the seller.
When a property goes into foreclosure it is either sold at auction to an investor or returned to the lender as collateral for the outstanding lien. When that property is returned to the market by the lender it is considered a bank owed property or REO. This means that the bank must approve all offers and costs associated with the sale of the asset to recover loss on the outstanding debt.