Please see my blog with tips and advice on short sales
I'm sorry that you are having some difficulty with this short sale transaction. The first answer below is correct in that your rights depends on what your purchase agreement says and the shortsale addendum. Here in California, our typical purchase agreement and shortsale addendum says that the transaction is subject to the seller's lender's approval of the transaction. Because the transaction is a shortsale, the seller will not know how much of the remaining debt will be forgiven by the seller's lender until the seller's lender sends the shortsale approval letter and terms. If the seller's lender refuses to forgive the remaining debt or deficiency, the seller may refuse to consumate the transaction because the seller's lender may still try to come after the seller for the remaining debt even after the sale is closed by garnishing the seller's wages, etc. As such, the seller has a right to review the terms of the shortsale approval to determine if they are agreeable for the seller.
The only type of shortsale that may insulate you from this risk is the HAFA shortsale which is a government subsidized shortsale approved by President Obama and enacted in April 2010. HAFA means Home Affordability Foreclosure Alternative Program. Approximately 100 lenders/servicers agreed to honor the HAFA shortsale. The HAFA Shortsale applies to owner occupied properties OINLY and the homeowner must have suffered a financial hardship that makes it difficult for the home owner to afford the mortgage such as loss of income, illness, forlough, death of income earner, etc. In a HAFA shortsale the remaining debt or deficiency must be forgiven by the seller's lenders. The government pays the services an amount for thier loss and the home owner gets up to $3000 for relocation and his debt is fully forgiven.
I will recommend that if you are unable to work out this current shortsale or if the seller cannot qualify for HAFA, you should limit your future search for homes to regular sales, foreclosures or HAFA shortsales to limit your risk of the the seller changing his/her mind after you have waited so long.
Do not hesiate to call me at 818-825-6996 or visit my website at http://www.BogunRealtyAndLuxuryHomes.com.
YOU need to get a copy of the short sale approval letter & see if it says anything in there about the bank Releasing the Lien Paid in Full OR if there is language in there about the bank "Reserving the Right to Pursue the seller in the future for a deficiency judgment".
This may be what's holding up the seller from signing off on the short sale approval letter.
The listing agent CAN still negotiate with the bank to make it so there is no deficiency judgment option for the bank to pursue the seller in the future. BUT if this is an investment property for the seller, he may not be able to complete the short sale & NOT owe the IRS $ next year.
HOWEVER, if there's no way out for the seller & he's going to owe this tax to the IRS, it's going to be a LOT better for him to complete the short sale, because he's going to owe a LOT MORE by letting it go to auction or revert back to the bank for an REO sale.
The seller CAN disagree with the short sale terms being offered by the bank & kill your deal, unfortunately you don't have any rights in this. The short sale, however is still usually the better deal for any seller though.
Feel free to contact me again if you have any more questions or copy & paste my response into an email to the listing agent, maybe he/she needs some guidance in explaining things to the seller.