As between you and the seller, it's really more of a disclosure issue, and then a negotiation issue. Since you've already found out about the problem, it's now a negotiation issue. I would not necessarily assume the seller wouldn't pay to fix these problems, but they also don't seem like the most major problems possible. Presumably you're getting the house at a good discount, more than the cost of having a new water heater installed.
What you don't want to do is buy the place and ignore the problem. CO can be a serious issue, and water gets heated 365 days a year, unlike say a furnace, where now you would have a couple of months to fix.
Step 1, Enter into a purchase and sale agreement subject to financing and a home inspection.
Step 2, Do the home inspection and if the problems are more than you want to deal with then you have the option to move on to another home or try to get some $$$ from the seller for this work.
Even though the sale is a short sale you can still treat it as a normal deal.
The problem with short sales is at any time another offer can come in during the pending time and if it is higher than your offer you might have to raise your offer to be the best and highest.
Good luck, Jirius Isaac