Kris Simpson has very thoroughly explained the process to you, and at this time, you have a hard choice to make: 1) agree to the bank's proposal or 2) not agree and cancel the contract. Unfortunately, ti appears that the bank's BPO or appraisal has revealed the fair market price of the home to be $225K or above, and the bank is asking you to increase your offer. You can certainly try to counter back, but its unlikely that the bank will agree to any counters at this point.
Depending on how much you like this home, it may well be worth the $8,000 difference to purchase the property. If not, however, feel free to move on to the next property I might caution you that a short sale is NOT and should not be construed as a 'fire sale' of a distressed property. While the banks are definitely willing to agree to take a loss on the mortgage owed on the home, most banks and lenders are not willing to take a huge loss on the sale of the home compared with the appraised or fair market value.
So talk it over with your Realtor, review the current comparables, and make the decision regarding whether to take the bank's offer or move on to the next property.
Grace Morioka, SRES, e-Pro
Area Pro Realty
San Jose, CA
Short sales can be a little daunting, especially to a first time home buyer. If you're willing to hang in there and wait - you can get an awesome deal! One other helpful tip for you - even if a seller accepts your offer on a short sale, while you are waiting on the bank's response, I would recommend that you continue looking at other homes and write an offer if you find something else you like. If you get an offer accepted on another property, you can always withdraw any other offers you've written prior to them being accepted.
Hope that helps! Best of luck to you.
Kelly Gebler, Broker
Keller Williams Realty
From your question, it appears you are not represented by a real estate broker, which really is most appropriate in these circumstances. Short Sales are a long, challenging process. Also, if the bank sent you the counter offer, it would seem that this is an REO (real estate owned) property, not a short sale. The entity you are dealing with is different than if it is a Short Sale, where the Seller (the bank's borrower) is still involved as far as signatures on offers that are submitted to a bank for approval.
If you ARE represented by a real estate broker, then they should be assisting you in the decision of whether or not to submit an acceptance of the bank's/seller's counter offer, or to respond with your own counter offer. Either way it is your decision if you want the property and what you are willing to pay for it.
If I can help please let me know.
World Wide Realty