You don't have anything to loose by continuing looking and submitting other offers.
But...you will if you don't have an accepted contract by April 30, 20010....$8,000 home buyer tax credit for first time home buyer || or $6,500 if you're trading up...http://www.federalhousingtaxcredit.com/
If you want to stick with this property, I strongly suggest you & your buyer agent DEMAND that the listing agent turn this file over to a short sale negotiator. Hopefully your agent knows someone or can get a referral to someone through his/her broker, if not I'd be happy to give you both a referral to a good negotiator.
Let me know of you have any questions or need anymore help.
John & Sarena Villaescusa
Keller Williams Realty