Update: They turned our offer down and wouldn't give us a counter offer, they wanted the full price. So we walked. Now they are talking to the realtor about lowering the price soon. What? Why not take our offer then? Idiots. We're back to looking again and believe me there isn't much out there. Bummer.
Update on the update: We've decided since seeing everything else in the bracket we were looking at to give this one another go. We made a counter-offer and we'll see if that makes the bank happier this time. Wish us luck.