There is far more that goes into your financial transaction than anyone on the outside will understand. Banks and the world of finance are very complex entities. There are million moving parts and scenarios behind the scenes that none of see from the outside. There are managers with directives and complex financial scenarios that must be taken into account. There are also government dollars and tax incentives at play that would be very difficult for any of us to fully understand. Needless to say what appears on the outside to be something as simple as them losing money may not be as it appears. In the end they might end up with more through goverment reimbursement or by writing off the entire loss than had they sold it to your buyer for $135K.
Keep in mind also that the price at the Sheriff's sale means nothing. What will mean something is the price at which they sell the property once they own it. All is not lost however, you can continue to try and sell the property to another buyer in MN for 6 months (during the redemption period). Keep at it and you might get a short sale through up until the very last day.
#1 Trulia agent in MN
and if anyone is interested the property could have been sold probably without going short once it was discounted at the sale. This person probably lost money doing the cash for keys instead of just selling (where they would have actually made a profit)
We call them M2M deals...
This is an over-simplification, but it gives you an idea of why this happens... I know, it makes my head hurt too.
As for the cash for keys option, there is no recourse for it being 30 days late. They don't have to offer it at all, but it sounds like someone dropped the ball on that one.
This situation is called an "underbid" and I specifically look for them because it can be worked to the seller's advantage.