When a homeowner defaults on his/her mortgage, banks may give them the option to sell the home “short”, or sell the property for less than what is owed on the mortgage. Banks will sometimes prefer this to foreclosure, given the time-consuming and expensive process they must undertake to sell properties they foreclose on (such as auctions and REO’s). If a bank approves a short sale on a home, this could provide a good opportunity for a buyer to acquire a property at a discount, from a homeowner who would like to sell quickly.
There are some downsides to buying a short sale property. The sale process may take more time than a traditional retail sale to complete, because the lender must approve the short sale and sale price. Also, the approving lender will rarely agree to pay for any extras that a regular seller would normally agree to, which could mean higher closing costs for the buyer.
That said, as with any source, you can find houses to flip among short sales, so don’t count them out. Ask a real estate agent about short sale listings and look for phrases such as "subject to bank approval," "pre-foreclosure," "third-party review required," and "pre-approved by bank"—they indicate a home is being sold short.