You have received a lot of good advise. Without knowing a lot more of the circumstances it is difficult to be specific. A couple of points though for consideration.
1) Short sales are notoriously difficult if not handled correctly. And correctly, appears to be different for every lender involved and the loan that was on the house before.
2) Because 1) you need to be very clear on who has approved what. Has the seller approved your offer as well as the bank? If the bank has not approved then you do not want to do anything.
3) What kind of loan are you approved for. If FHA , 203 is probably the only option, but in general this may eliminate you as a person doing the repairs unless this is your primary business activity. Your lender should be able to be of assistance with good advise.
4) If you need to put a lot of repairs into a house then the purchase price needs to be in relation to the repairs that you put in along with what the house will be worth when you are through with all of the repairs. If purchase price plus repairs are more then the market value of the house. Then start looking else where.
5) I would be very careful. If you are on Trulia asking questions like these then you are not comfortable with your realtor and lender because maybe you are uncomfortable with the advise or lack of advise. Then reevaluate your position and decide how you want to go forward. A real estate transaction can be full of possible problems, especially a short sale that needs a lot of repairs to be livable. Are you up to the challange financially and mentally?
There are a lot of homes on the market today, interest rates are at historical lows as a buyer you have tremendous opportunity. Don't squander the opportunity on something that is not worth it.