I agree with Geoff's answer below and want to elaborate somewhat on what I have seen as a Real Estate Attorney here in Illinois. There are some realtors who represent short sale listings who like to use what I call the "que" method. Now remember that everyone operates differently and so this is a rough idea of what I mean, but since there is no real standard out there for this, and no rules from the MLS (multiple listing service - where the realtors list properties for sell) or ethics rules preventing this right now, this is what is happening. I personally DO NOT represent short sale sellers that use this type of system.
The listing realtor will take your offer, not have the Seller sign it, but submit the offer to the bank. They will tell you that you are in first position. Now, as has been mentioned, some mortgage companies will not take an unsigned contract by the Seller to negotiate with. How are the realtors/attorneys representing the Seller getting around this to negotiate??? I am unsure. I do know this though, every mortgage company is different, some take unsigned contracts, some don't, some probably don't even notice.
As mentioned below this allows the realtor to keep the property as "Active" in the MLS instead of "Contingent". A property marked "Contingent" can still have offers placed on it (backup offers), but most realtors will tell you that a contingent property will have far less showings than a property marked active. So what happens next is the agent takes other offers and puts the next offer in second position, and the next in third, etc, etc.
In theory what is suppose to happen is that if the bank accepts the first offer... great!! If they come back saying they need $20,000 more or whatever the amount is, then the seller goes to the first position and asks if they want to go up to that amount, if not they go to the second and ask, if not the third and so on.
Now not every listing works this way, in your question above you are right they could accept another contract and just offer that up to the bank at a higher price. In this area of Illinois though, even if there is an accepted contract, it is usually with a "Shortsale Rider". That rider says that the Seller can continue to offer the property for sale (although marked Contingent in the MLS), but if an offer comes in "more favorable" to the Seller, then they can ask you to match the terms of that offer and if you decline they can "kick out" or terminate the contract with you and return your earnest money.
Legally if they have not signed your contract, remember at that point it is just an offer. So the Seller can reject that offer with no consequence and you can rescind your offer and not be committed to purchase the property.
It is a complicated matter, remember the Seller can still be potentially 1099'ed for whatever forgiveness amount the bank forgives and may have to pay tax on that amount like income, so on one hand, trying to get the highest price for the Seller as their agent is an admirable thing. On the other hand, the Buyers are typically waiting 2 - 7 months to close on the property, and to get kicked out or out bid in month 6 isn't fair either.
Here in the Chicagoland area (of which Wheaton is a part for you readers other than Vic), attorneys are used in practically every residential real estate purchase. In my opinion, this is never as important as with a Short Sale, and it is important that you have an attorney that is well versed in the subject.
If I can be of any assistance, please feel free to contact me at 630-789-6833.
Is the owner represented by a Realtor?
In business there is no contract unless it is in writing. If this is your first question, then I would be on the lookout for more problems. Particularly if Trulia is your only source of information...meaning that neither party has professional representation.
It's just a game. Short sales are becoming more difficult with outcomes usually resulting in foreclosure and then being relisted as a bank owned. There are better deals out there then short sales with less headache.
RE/MAX Tropical Sands