Under contract on REO property, I found squatters moving in.

[Mijeong B.]

Hi. We are in a very difficult situation and hope someone can help.

My husband and I have just started investing in real estate in St Petersburg and this is our first flip project.  Currently we are under contract expecting a closing some time this week .  Yesterday my husband was driving by the house and found that a woman (with two kids) were moving furniture into the house. Of course, my husband was puzzled and asked what's going on. The woman said that she rented the house from somebody named Juan Garcia (which sounds like a random name) and paid $1,250 to him and claimed that her husband had the lease agreement.  But her husband was not there on the property. At first, my husband thought that they were victims of some sort of rental scams. 

When my husband informed the listing agent of the situation, the agent went to the house and changed the lock while those people were out of the property (There was no utility service connected as of yesterday). The woman called my husband last night and complained that she was locked out of the house while her personal belongings were in the house. My husband told her that there was nothing he could do, as he was not the owner of the property. We though that it was the seller (the bank and the listing agent)'s responsibility to handle the issue. 

Surprisingly, however, the listing agent informed our agent today that he would not deal with the situation, so our  agent and we should take care of the squatters. The listing agent's argument is that because the status of occupancy on the contract is "occupied" (the property had had tenants but they apparently moved out about 2 months ago), they are not responsible for the squatter problem. We think it is so ridiculous that the bank and its agent put all this burden on us, even though we do not own the house. 

We are considering walking away, but the problem is our earnest money deposit. It seems clear that the bank will refuse to return our money back based on the fact the contract has the "occupied" status. The squatters are not occupying the house now, but their belongings are still in the house.   What's the best move for us? Can we get the earnest money deposit back if the bank does not vacate the squatters' belongings?