Hello Mony. I can understand your frustration, but from what you are telling us in your post, I can't figure out whether you cancelled the contract or whether you are still in contract. If you are, I am wondering whether you could not wait and see whether the lender approves the short sale. If that's an option, the contract could be revised to reflect the short sale situation and there should be a time limit for the bank approval. If the owners are not short by a lot of money, there's a good chance that the lender might approve the short sale. Of course without knowing more about the borrowers situation, it's hard to tell.
I am also not sure whose fault it was that it was not made clear that this was a short sale. Sometimes, a listing becomes a short sale because of a pre-payment penalty that was not known to the listing agent and sometimes even the borrowers are not aware of the pre-payment penalty (yes, that is possible). So, without knowing more about the circumstances of your particular situation, it's really impossible to render an opinion on who should pay for what. If you have not already cancelled the agreement, I would say there's a good chance that the owner is still bound by the terms of the agreement and may have to come up with the money to close escrow. You can't unilaterally change the terms of the agreement just because you found out that you owe more than you thought you did. If this was an innocent mistake, it's possible that the seller is not short by much. If it was information that was intentionally withheld from you, I personally think that someone should reimburse you for the cost of the inspections. To me, it does not make sense that someone would purposely enter into a contract that does not address the short sale contingencies when they know that they can't perform because they don't have the money to close escrow. You should consult with an attorney about your remedies. However, frankly, unless you intent to force the performance of the original contract that you entered, I am not sure you'd want to spend money on getting legal advice on how you'll be able to recover a few hundred dollars. I am just trying to be practical here as I would not want you to spend as much money as you'd be able to recover. Good luck to you.