I have a short sweet answer to this question on my blog as well. The important thing to know for a buyer is that short does not mean it will be a quick process. It means the seller's bank will take SHORT of the amount currently owed on the property. The buyer will frequently wait for 2 weeks to 3 months to get an answer on the offer submitted. How long depends on the seller getting documents lined up, the list agent being savvy and the bank being urgent. I am happy to assist you withthe process.
Basically a Short Sale is the right to sell a home for less then the mortgage that is due on the property.
The listing agent or seller has to prove that there is a reason they can no longer afford the home. Such as loss of a job, etc. Loss of equity in the home is not a reason to sell your home as a short sale.
The bank will require documentation from the seller, such as tax returns, bank statements, paystubs, etc.
The next step for a sellers agent to do is get a offer on the property and present it to the bank. The bank will then review the offer through a negotiator who will then have an independent Realtor perform a appraisal or Broker Priced Opinion(BPO) on the property to see if the offer given to the bank is of fair market value.
If it is then the owner of the home is allowed to sell the home for less then what is owed.
In some cases the remainder of mortgage balance is forgiven. In other instances the bank will ask the seller to sign a promissory note for the difference.
That's basically the easiest way I can explain it. There are tons of other details that go into and it gets alot more complicated if there is 2 mortgages on the property or liens.
I hope that helps. I have a blog on my profile that explains a short sale on the buyers side that might interest you.