There was a recent consumer post on Trulia where a buyer had been waiting since October to get lender approval on their short sale, only to be told this week that the seller had backed out! Seems the seller was able to do a successful loan modification with the lender that lowered their payment and they didn't have to move after all!
Well, good for the seller; bad for the buyer. The buyer's agent wanted the buyers to sign a release and give them back their earnest money, but the buyer wasn't so sure - I think he really thought something fishy was going on.
As evidenced by the varying responses from Real Estate Agents all over the county, the law is very different in every state.
My response to those buyers was to seek the advice of an attorney - this is a way too legally complicated situation. Certainly, sellers can change their mind about selling, but there are consequences. Should the seller pay the buyer some sort of damages? Maybe, while waiting for lender approval, there was another property that came on the market that the buyer's would have prefered, but since they were locked into a CONTRACT, they missed out? There are many scenarios one could play out here.
In Kentucky, once the SELLER has accepted a buyer's offer, it becomes a CONTRACT. If the house is going to be a short sale, the contract will have a CONTINGENCY that says the CONTRACT is subject to the lender's approval of the short sale. So in Kentucky, a short sale contract is an enforceable CONTRACT once the seller has accepted it. Anything beyond this, an attorney would need to address. (In Owensboro, KY, I recommend attorney Jim Watson, ph: 270-689-2424)
The other question that this post raised in my mind was: Will the selling agent try to go after their commission (from the listing broker)? They did bring a buyer and after all, it wasn't that the short sale was not approved. The seller didn't even try for a short sale - they went for loan modification. My other concern is whether this property was falsely represented to the public as well as the real estate community? If the seller was trying to get a loan modification, they should not have listed their home "for sale".