You don’t need to have the deed in your hands to do a short sale. However, I know it is a safety net for the investor who does not want the homeowner to sell the home to another or list with an agent while trying to buy and negotiate a short on the home. Truly, the best thing for a homeowner to do is list their property. That way it is marketed to a large number of potential buyers. Banks want to see this rather than an individual investor making an offer. Unless it is in a really scary area and the bank knows that.
Most title companies do not do Land Trusts either. The thing you need to remember is that when the seller signs over the deed, they are still responsible for the home mortgage, insurance, taxes, etc. The homeowner is taking the risk that the investor is a good guy and really going to help them get out of their situation.
Makes sense to me what the attorney says. If you think about it, once an investor has possession of the deed, they can muddy up the title with and the investor is not the one the title company sold the insurance policy too but rather the person who signed at the table.