The bank loses either way -- they either take a reduced payoff or they have to foreclose and lose money on the resale.As for the buyer, if he is slapped with a deficiency judgment -- and/or if he is hit with a tax burden on the deficiency amount -- then the best thing for him would be to sell at as high a price as possible, thus reducing future financial burden.And as for the agent, a higher sales price results in a higher commission.So, in actuality, the higher the short sale price, the more EVERYONE wins (or loses just a little bit less).

Any rent deficiencies come out of the security deposit, but otherwise I return their deposit, assuming I can show/rent the unit while they're living there.

@J Scott I wasn't trying to make you look bad, I was just laying the cards on the table, if all other things being equal, that my applicants are equally qualified, I'd choose that path of least resistance too, there is nothing wrong with that, however, there is an issue when that deficient applicant is the only applicant or applied before another applicant.

Very few prospective tenants ask in advance about how well insulated a building is, but if there is a deficiency, they will let you know.When we get a heat wave, I encourage tenants to block as much sun coming through south facing windows as they can.

It sure sounds like you had several legitimate reasons to withhold portions of the security deposit but it will ultimately come down to weather you properly documented the renter's deficiencies and if you did a proper and timely security deposit accounting per The laws in Massachusettes.  

I don't take anyone with serious credit deficiencies, don't believe current landlords who often just want them gone.

It OFTEN happens, more times than you would think and as much as 50% of the time.The requirements for a righteous sale have been legislated much more difficult over the years.There are 3 notice requirements and if ANY of the 3 is deficient, it could be enough to set aside the tax sale. 

Or discount the value of the subject home, if you can't find comps with that deficiency.  

I made sure that their approval stated that the borrower was not responsible for any deficiency.

I can imagine many scenario's where publication may have been deficient.