Wow, lots of issues here. . .hard to say what is going on. Has your agent asked the reason or the counter above asking price? I would love to hear that reason.
And, in a short sale situation the home should be priced at or very near market value - that, after all, is the purpose of a short sale - to sell the property in advance of foreclosure. Why a seller would counter, if the home were properly priced, is puzzling. Perhaps the bank told him to counter because they felt the asking price was too low? You see, the most difficult part here is that as agents we are supposed to be listing potential short sale properties at or near market value but the bank won't tell you if they agree or not in advance of an actual offer in hand. Yet another great example of why you should avoid short sales at all costs!
There are way too many really great foreclosures on the market to be bothered with short sale in my humble opinion. Even if the seller and the bank approve a short sale, third parties can kill the deal. Why go thru the hassle?