Short Sale Appraisal Came out Way higher than initial Drive by Appraisal - Kills Deal?

[Will F.]

So I'm making offers on a short sale where I know the agent as well as the short sale seller.

This is a deal in Los Angeles county. Initially, the bank told the agent that the "drive-by" appraisal was only $245k. So I made an offer on the house for exactly $246k cash. I'm not even sure if cash helps because the bank told my agent cash or non-cash offers do not matter!!

The bank replied that they require a "regular" appraisal and this came back at a whopping $365k. ($119k higher) This is despite the fact that the property is distressed, has a dead landscape, trash everywhere, and is completely run down and out of date compared with anything comparable.

The bank said they will only accept 95% of the $365k, which is $346k and not even a decent deal. ARV comparables are around $390k and we have to do about $25k in rehab. So basically it would break even, but not after closing costs.

I was thinking of raising my offer to $275k, but that's still not anywhere near the $365k they want.

Also just FYI the amount owed on the property is like $378k

At this point what are my options? Should I just make another low offer to the bank? Could I just talk directly to the owner of the house? He simply wants to "unload it and not do any work". Could I have my agent do a BPO or will that accomplish anything?