First, what you describe, referring to the auction is typical short sale antics. Nothing new there.
Agent moving into house. That is new, but irrelevant in this situation.
Getting money back.
Remember, it's a short sale.
Those stacks of papers is essence stated the buyer will hold bank and banks representatives harmless even if the bank action is the cause of material lose. That what it says and the buyer agreed to and signed many times.
The deposit/escrow will be returned (unless the documents state money is non-refundable) at the time of the banks choosing. Wait it out. The agents involved know the process. They however have notinfluence regarding what happens behind the veil of secrecy from with the bank operates or able to influence the speed at which they perform.
Your Daughter and her husband were warned that short sales are a wild ride with an unknown outcome. What they were told has proven to be true.
Welcome to the Wild, Wild, West of Real Estate - Short Sales.