Turned down for loan mod...now short sale or subject to deal?

[JJ Neerman]

Good evening B'P Community!

I've got a house in rural East Tennessee that hasn't sold in four years. Two years ago we relocated to Oklahoma. we've still paid the mortgage the entire time; well, up until four months ago when we tried to start the loan modification request process through our mortgage lender. I could not continue to throw good money after a bad market. The mortgage company said we couldn't request loan mod unless we were delinquent, so we didn't pay for two months and started the process. one of the first questions was is the house occupied, to which we answered no. Interestingly that was the sole reason we were turned down for the loan mod. 

so the loan mod rejection occurred Monday, Jun 20. On Memorial Day we signed a lease with option agreement with a family interested in buying the house in time. 

Since the loan mod was rejected, the lender can start foreclosure unless we pursue a short sale. they even still might start foreclosure, but as i understand, foreclosure would be paused until the short sale process is completed. That said, would it be in our interest to try to amend the lease with option agreement with the tenant to a subject form to prevent foreclosure and the gamble with the short sale?

If i could find an investor who would want the house, i'd try short selling, but i'd like the tenant to stay in the house until he decides he either wants to try to buy it or move on. OR sign the house over to him with a subject to.

An thoughts or advice? my ultimate goal is getting this property off my books, and i am willing to consider almost anything.

thanks in advance!

JJ