Hey there Bharaty....
I always wonder why, when people talk about "investors", they tend to refer to us "investors" in conjunction with quotation marks. :-) As if we are some mythical creature or some by-product of a "Real Person".
I know a gentleman who, when he called his state legislators about some pending legislation on foreclosures, and said that he was a Real Estate Investor......CLICK - Buzzzzz. (hung up on) But when he called back and said that he is part of a HUD certified counciling center....oh....well...."you don't mind if we ask you your advice on how we write our legislation do you?"
And your mortgage broker may want to start educating himself/herself. It's either LEGAL or NOT LEGAL. There is no such thing as borderline illegal....That's like being kinda-maybe pregnant. :-) Your mortgage lender may not have been exposed to this type deal, so their first response is that since THEY haven't done one before....that something's wrong or illegal with it.
Being that all the information is not present here in this discussion, I can only hope to point to an answer with the limited amount at hand.
As far as the sheriff's sale...maybe it's on hold. I don't typically deal with auctions and sheriff's sales because they are different in every state (let alone every county). That's not my area of expertise.
And YES...it's possible to "flip" (as most people in the public refer to it) a short sale. It's done with option agreements, assignment contracts, and many things that most people haven't been educated upon. That's where we Investor's come into play. We create solutions.
Here is a link to a simple example of how it's done:
It can be done with double closings/simultaneous closings. If you haven't already done so, I would definitely acquire the services of a KNOWLEGEABLE closing Attorney/Title Company. THEY would be able (not your mortgage lender) to tell you if this is a possibility. Make sure the Attorney is familar with the short sale process.
If everyone is communicating in the process and keeps an open mind, then there can be a solution where everyone wins. And that's what most of us are looking for in the first place....a win~win situation for everyone.