Deal Fell Through- Shortsale to Follow?

[Nicolas Blish]

Hello Fellow Investors,

Share your similar stories below and help me figure out if I can continue chasing the house or if the deal is gone!

Background, flooded house has been gutted and treated.  Listed for sale as is.  We came to an agreeable price, well below his pay off left on the house due to not having flood insurance.  When the bank was brought into the equation the deal was shut down and I believe he will be pursuing a short sale instead now.

What does this mean for me and my offer?  It's all subject to bank approval now, right?  Does a local bank even deal with this thing or is this handled by the Feds?  I believe he used a rural development 100% financing loan.  

Anyway, just frustrated that another deal slipped through and looking to see what others have experienced and if I have any hope of getting this property at a decent price still.  I imagine that the bank will want more than I was willing to pay but I'm not sure how the appraisal would come back on a gutted house.