Have you seen the appraisal?
Ask for a copy. Your Realtor can tell you what range the property would sell for normally. In Texas, if you had cash and sent an offer for cash at the listing price, the owner would have a difficult time refusing it, but the problem is most short-sale listings have wording that the offer is subject to bank approval.
Moreover, the listing agent may have listed the property without regard for its true market value. Many Realtors have taken this bad habit from highly distressed markets in Florida and California.
As pointed out, the listing Realtor should have gotten clearance from the bank for what price would be acceptable prior to listing it. Many don't do that. And some banks have gotten a reputation for dragging their feet on responding and responding with unrealistic counter-offers.
Research the original selling price of the house and the underlying liens on it to determine what the bank is likely owed. If you're asking to pay $5 for a $10 property, it is probably not the bank that is wrong. It could be the listing agent who underpriced it to begin with.
Negotiation is a fine art. You have to understand what the other side will settle for. No one can advise you what price to offer without an idea of the property's market value. At that point, don't expect to knock off more than a chunk of the bank's stake in the house. The cost of foreclosure and subsequent holding costs may be high, but you're trying to save them some of that cost by buying it before foreclosure. If they lose $30k on those costs, you can't expect them to sell it to you for $50k less than what they're owed.
Do they price to market?
Yes. If the market value of the house is $625k and they're owed $425k, you can expect a price between those two numbers. If the market value is $450 and they're owed $375, the range will shift down. The problem in other areas of the country is some values are below the loan balance(s). The banks have to weigh the costs compared to market value in those areas and decide if the loss is higher after foreclosing or selling beforehand in a short sale.