In real estate, a short sale is a way for a homeowner to avoid a foreclosure. In both situations, the homeowner is at least several months behind on payments. In a foreclosure, the bank or lending institution seizes the house, and they now own it and have to try to sell it themselves (or through an agency). In a short sale, the homeowner agrees with the bank to sell it for less than it is worth on the market. The banks would maybe agree to this because it means the house will get sold, saving them the selling responsibility. But they are losing money, because the house is selling for less than it is worth. Sometimes, they make the homeowner pay the balance, and sometimes they forgive it.
Short sales are not always a great deal because of the highly inflated prices of the housing bubble. For example, if a house that normally costs $100,000 was suddenly 'valued' at $200,000, and someone got a loan for that amount, they would want to re-sell it for $200,000 or even more to make a profit. However, values dropped. So now, they may short sell (less than it is worth) the house for $175,000, and lose $25,000. But to a new buyer, that $100,000 house is probably still not worth $175,000. So see what the average is for that house over time.