Joe,
It could be something as simple as this ...
http://www.brickboard.com/FAQ/700-900/TransmissionManual.htm#M47ShiftLinkageCausesHardShift
I'd check this out in the 700/900 FAQ.
At the very least get a second opinion.
$500 for a used tranny is pretty steep. Used AW71/or M46/47 transmissions at my local Pick and Pull go for about 90 bucks.
My brother in law in Phoenix was quoted $3500 for replacing his 760's AW71 w/a used box ... I located a shop in Tucson that charged him $875 and they towed it in for repairs. The tranny they installed has worked flawlessly for more than five years and 50 K miles. So if you can't do the work yourself, at least get a second opinion and another price quote.
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