You may be over paying for the property even at 85% of list, a lot more information including an on-site evaluation is needed to render a informed opinion. The information you provided is a starting point in a forum discussion but it is by no means ample for a professional opinion.
Several good articles about what a home is worth and what it is not worth can be seen at: http://LivingWellinSanMateo.com/?$=what+your+house+is+worth .
One final thought: What is the seller needs to get or what the seller wants to get are not relevant is establishing the homes value to you. Don't be swayed by the emotions of the seller or yourself.
First, what is the house worth today, with the improvements? I can't comment on the Belmont market because I don't know it. However, in many markets that would be a steep increase in value. However, if they bought it under market value a year ago, then intelligently added some enhancements and upgrades, and if the neighborhood can support that value, then it could be worth it. On the other hand, if they bought at market value...if prices have remained flat or declined...and if they've been watching too many shows on cable...they may think that $250,000 in upgrades equals an increase in value of $250,000. It seldom does. Bottom line: You really have to have a Realtor familiar with the area run comps.
Second point: You ask: "Would it be insulting to offer 85% of asking?" Who knows? And, generally, who cares? Some people get insulted if you offer a penny less than the listing price. Some listen to Realtors claiming that houses sell for 97% (or whatever) of the listing price, so they get insulted if the offer is lower than that. It doesn't matter. And don't try to read the seller's mind. Figure out what the house is worth. Really worth. Then adjust that number depending on how much you like the house. Know what you can comfortably afford to spend. Then make an offer no higher than the lower of: (1) the house's value to you, after you know the market value, or (2) what you can comfortably afford.
Hope that helps.
At the end of the day make an offer you are comfortable making trying not to offend but being fair to yourself. Hopefully an offer will get negotiations going. The sellers realtor HAS to submit every offer they get. Call me if you need a realtor. 949-632-3129 I live in Long Beach and work that area.