A short sale is one where the sales price was insufficient to pay the total of all liens and costs of sale; and where the seller did not bring sufficient liquid assets to the closing to cure all deficiencies.  In other words, the seller had to sell at a price where they needed to bring money to closing, but they couldn't. 

A short sale almost always results in an incomplete payoff of one or more mortgage debts, so a lender has to agree to a short sale.  Lenders are apt (in the current market) to consider a short sale because they are likely to recoup more of the money owed to them than if they are forced to foreclose on the property.

I am listing a property this week that will almost certainly be a short sale, and I was surprised to learn from the owner that the bank had encouraged the short sale and was quite willing to go along with a short sale.  This was somewhat of a surprise to me because over the last years I have heard countless stories of lenders who are hesitant to consider a short sale, and instead pursued foreclosure. 

If you are considering buying a property that will be a short sale, it will likely take a little bit longer for the transaction to take place, as the bank must approve of the deal that is worked out between buyer and seller --- but a short sale can be a great opportunity to buy at a good value.