Short Sale Bank Negotiations. Who is high in this deal? Is it me?

[Linda Weygant]

I've been trying to get a bank short sale under contract. It's got an ARV around $220, rehab costs around $40. I put an offer in that was about 12% over asking (acceptable for this market), but still left room for profit as a flip. They seemed very excited about my offer, asking for lots of additional information such as could I be flexible on a close date (yes) and some other minor issues that weren't clear (to them) in my original offer.

This morning, they said that they got an appraisal in for 130% of my offer and I should submit my highest and best.  After I picked myself up off the floor from laughing so hard, I pulled out a calculator and a pencil and came up with some numbers.

Based on some information my agent has, I was able to back into the probable balance of the mortgage.  My original offer would definitely be a short sale.  Because of the condition of the house, the listing says it had to be a cash offer.  No problem.  

However, with this new price, it puts it over what I'm estimating the mortgage balance to be by quite a long shot.  Which makes it no longer a short sale. right?

But the thing that has me really scratching my head is that the new price would be retail - what an owner/occupant might pay. ARV of $220, back out the rehab costs of ~$40 and you've got what the appraiser came in at. However, it's got to be a cash purchase and I guess I thought that not many owner occupants wanting a house in this neighborhood would have $180 of cash laying around.

So who is high in this deal?  (I am in Colorado, but I don't smoke).