If you are willing to go higher than what the asking price is, go for it. Otherwise, get out while you can and try your best to stay away from Short Sales unless you are willing to pay more than asking price and have plenty of time to go through the process. FYI, I have a friend that has been going through a short sale for 6 months. The bank keeps re-nogotiating the price.
Do the recently sold homes in the direct neighborhood support the price they are asking? if so... decide if you want it or not. You can try to negotiage but may or maynot work for you. If the price does support the price they want decide if that is acceptable to you or not.
If the price does not support the price they are asking... have Realtor send bank recently sold homes in the neighborhood to prove why that is unreasonable.
Part of the short sale process is that indeed the bank must agree to all that is presented to them.
HomeSmart Real Estate
The bank can do as they see fit.
As stated if it's still a good deal, buy it, you need to remember, if you make another counter offer you may be put back at the bottom of the negotiators pile, and start all over with the process.
Bottom line, if it's reasonable, buy it! If notho,d your ground and call their (maybe) bluff. Is it worth losing the property over starting over, or is the new offer still a good deal.
Have a good discussion about this with your agent!