I really need some insight. Seller didn't choose our offer.

[Chris Hanisco]

Hi everyone! This is my first post. I'm glad to have found your forum!
Myself, my husband and my 2 little boys just moved to the Nashville, TN area from NH. We have some cash from selling our other house and from an annuity we pulled. We have been looking for a house, and found one that we loved. It needed a lot of work, but we're pretty handy and our last house was a fixer-upper.
The house is a short sale (pre-approved) and listed at $82,900. It sat for months at $99,500 and then was reduced by $17k to the current price around February 7th. I found it online, drove by and then had our realtor show it to us the next day. We loved it and put in an offer for full price (cash, no contingencies), but then another offer also came in at $80,000 and they wanted $2900 back in closing costs.
We were then told that the bank was saying bring your highest and best offers - but the selling agent miscommunicated this to our realtor. It was actually the sellers asking, not the bank. We offered $83,500 cash, quick close, no contingencies (except inspections but buying as is). Well, the other buyers offered $90,200 but are trying to get a Rural Development Loan. The sellers took their offer over ours even though foreclosure is supposed to happen on March 1st (in 4 days). The bank has not given a verdict yet.
So, we were really disappointed. We thought for sure we had it since we offered cash above the asking price. I can't understand why the sellers would take a risk of the other offer falling through since the inspections are like FHA and somewhat picky. I already know of 2 things that need to be fixed for it to pass.
We put in a backup offer for $85,000. (We were able to borrow a couple thousand from my MIL.)
Does anyone here have any insight on how often these rural development loans go through? I wish the bank knew about our offer because I think the bank would prefer it - but we're told the bank will only hear about the one the sellers accepted. I keep wishing I had spotted that house a week prior, and we probably would have got it. Hindsight is 20/20, right? :roll:
I'm really bummed out. Any advice?
Thanks so much,
Chris