You need to understand that the contract is between the buyer and the seller, not the bank. You, the buyer, agreed with the seller to purchase the property, but subject to approval by the bank. The bank does not have title to property to sell it to someone else.

The bank gave an approval for the short sale subject to 2 conditions: they must receive a certain amount of money (net) and the sale must close by a certain date. Many Realtors don't understand that the contract does not give the bank any right to sell the property. Certainly the bank can choose not to approve the sale, and the bank can select among competing offers to buy which one(s) they will approve.

Be warned, though, that failure to close within the time limit specified in the approval could nix your sale. The bank may not release their lien if you close later than they said and your closing would be messed up. Also, be warned that foreclosure is still a possibility. Even though they have approved the sale, they technically can still have the trustee sell the property on the first Tuesday of the month with proper notice. You need to close and have the deed recorded before that can happen.

Many Realtors also believe that a short sale is like some sort of auction and any other offers to purchase can come in after the seller and buyer execute a contract and bump the lower-priced buyer out. That's wrong. All subsequent offers can only be backup contracts and they, too, are subject to short sale approval.

The bank technically could rescind its approval, but why would they? First they would have to know a higher offer existed and second they would have to have a reason to delay closing to get the higher offer and third they would have to state a reason for why your approval was taken back (you did something wrong). The bank is a large animal with different departments performing short sales, foreclosures, and approvals.

To get them to rescind an approval would be a miracle since they are barely able to deal with all the properties they have without re-visiting a file every time a listing agent sent them a new offer. The new offer would have to be evaluated including the risk of the new buyer (based on his pre-approval letter) and a new analysis prepared to convince the approving authority that the existing approval could be bettered, even though closing later. Then if all that happened, they would have to have a reason to withdraw their approval and notify not only the buyer, but the seller and the escrow agent. The person in the bank doing all this would then be responsible if the second offer did not close. Too risky and too much work for everybody. It would be more logical to see the approved deal through and take action only if it failed to close.

Reluctance to discuss the short sales scenario is probably based on lack of knowledge. Up until last year short sales were extremely rare. There are no experts with years of experience in short sales out there. How can she discuss it if she doesn't know it or understand it? Equally, title companies haven't had that much experience either. Charges which are customarily paid by the seller often wind up on the buyer and this bothers them.

As to a penalty, who would be paying you? The seller? He's broke. The bank? The seller hasn't been paying his mortgage so they're not rich either. In fact, the bank isn't party to your contract so there is nothing for you to enforce against them.

A gentle suggestion: next time choose a Realtor who has done short sales before.
Also, short sales are not for those who need to be in a house a few weeks or who are impatient at all. It is a long and arduous process for everyone.

Nica,

Probably not. The lenders have standard forms and they don't really have time to negotiate one off deals by you marking them up or making changes.
You are right that they are very one sided....in their favor. Hopefully you get a really good price and that makes up for the difference.
Believe me I'm with you.....of course even if it was possible, if you have already signed the contract then it would be too late for changes now.
There are real risks to these contracts as you mentioned.....inspection, appraisal, lender fees, potentially a survey, not closing on time, etc. Seems like more and more of these are working out, but I'm sure some don't. If the buyer can't really risk this money to get a good deal, I ask them to stay clear. Need to move on a specific date...stay clear. If it is a one shot deal and if you loose the money and then can't buy another house, then stay clear. Best for someone who can risk the money for a better deal and who has some flexible on their current living arrangements and move out dates.

Good luck.....I hope everything works out for you and you get a terrific deal.

You may also want to check with your CPA...there can be tax consequences for you as a result of a short sale. Be sure to check that your lender will not come back and ask you to pay the difference between the loan balance and the amount of the 'short sale'. In today's market where short sales are common they probably will not, but it would be good if you had that in writing if you can get it. Good luck.