Lesson to all short sale buyers - don't get emotionally attached.
I'm sorry to hear about your situation. Even though you have a ratified contract with the seller, it is contingent on the banks approval/acceptance of the terms of that contract (there's probably some verbiage in your contract to that affect).
Review your contract regarding the contingencies and under what circumstances either party can withdraw. You indicated that the listing agent verbally notified you of acceptance but you did not recieve any written confirmation. If the listing agent is not experienced or knowledgable about short sales she may have misunderstood or miscommunicated the situation.
The bank may have approved the short sale (meaning they have agreed to allow the sellers to sell the home for less than what is owed on it) however they may not have accepted the terms of the contract you have. Often when they send back a short sale approval it also is accompanied by the terms under which the short sale must be concluded.
Thus although you had a ratified contract, the bank can reject it since it didn't meet their terms. They could have come back to you with a counteroffer but since they had a backup offer in place already, which was possibly better than your offer, they decided to reject yours and move on to the other offer.
As for the listing agent stating that contract was being terminated because you did not submit documents "on time", request that she/he provide you with further information on what documents were not provided in time as well as the applicable section of the contract or addendums that clearly stated that you would provide whatever these documents were and by when. If she/he can not show how you breached the contract, then she can not withdraw on that basis. However, they can still terminate it based on the bank rejecting it.
Again, a ratified contract does not guarantee you will close. There are many contingencies in a ratified contract and if those contingencies are not removed, they can lead to termination. For example, if the contract is contingent on you obtaining a loan, and if for some reason you can not get a loan, well than you would have to terminate for not being able to meet that contingency. The seller can't force you to buy the house if you can't get financing.
I hope this information was helpful.
Hate to sound harsh but better to tell the truth up front. Perhaps your agent did not tell you what to expect or gave you false hopes of your short sale offer. Legal help...I think is a waste of money..Broker to Broker..a waste of time. They may get answers for you..but it's highly unlikely they will help you get the house. Furthermore if your agent is any good..they don't need to cry foul to the broker..they should be able to handle anything themselves.
Let's look at the reality..It is a short sale..requiring 3rd party approval. If you are the bank and you have multiple offers..would you not try for the highest and use any loopholes or legal strategies to make that happen? If you are the seller...and ultimately responsible for the shortage..would you not do same?
I am not sure of the solution..but I think it's a big mess. If my clients try a short sale offer..I tell them simply not to expect much and we continue our search as if the short sale will never happen. This does two things...motivates the listing agent some..(because we have an out) and allows my purchaser to move forward without obligation.
Wish you the best of luck.
Erik J. Weisskopf, ABR, CRS, GRI
Listing and Selling New and Resale Homes Since 1987
The next step after that would involve seeking the advice of a real estate attorney.
It sounds to me like they had a back-up offer that was higher and just provided some excuse to go to the back-up offer. It is quite well known that some of the short sale listing agents are unscrupulous and do things that are very wrong.
Push the broker-to-broker issue; don't take no for an answer and make sure it happens today if at all possible.