Did your REaltor use the Short Sale Addendum? If so, read it.
A covered patio is not living space. If there is not permit as living space, then it sounds like the appraiser's value may be correct. That means that assuming you are financing your purchase if the appraisal is low either you bring more cash, or seller lowers the price.
Frustrating isn't it.
Yes, the Seller's bank can reject your offer for ANY reason.
They also can entertian other offers while processing yours.
Yes, you can cancel. 95% sure. I would have to see your contract to say for sure.
Hope this helps.
You need to provide a few more facts before anyone can give you a good answer:
1. In your contract, were you paying cash or financing the purchase?
2. Who is the party from whom you would purchase? In other words, who did you contract with? I would assume that the bank is just a third party who has approval over acceptance of the "short sale".
3. If you were financing this purchase, then your contract likely has a financing contingency which would also not likely be met because the property failed to appraise. Is this correct?
4. If the patio was not included in the appraised value and you believe that it has significant value ($60,000?), then it really is not a valid appraisal. Why would it not be corrected to account for the patio?
With respect to time for an answer, it is common that banks take a long time to approve a short sale. In your case, with a flawed appraisal, it could be another reason for the delay or non-response.
You can cancel the escrow depending upon what your contract says. By contract, in what timeframe was the Seller and/or the third party bank required to respond? In most contracts time is of the essence (meaning that you cannot miss a deadline to do particular things - such as respond to an offer).
From the details you have provided, I would presume that your offer is no longer valid given the passage of so much time. And, the Seller and/or Bank has likely failed to create a contract by accepting your offer in a timely matter. But, and this is a big BUT, it depends on what your contract says.
Let me know if I can help more.