So sorry Boozer. I remember your initial post on this house and it sounded incredible.
I'm sure you and your wife are disappointed.
But hey, who knows, maybe the owners will accept your new offer knowing full well that it may be the best they get considering the work that needs to be done. I'm pretty sure, by law, that the realtor now has to disclose any of the defaults learned through the home inspection?
The bigger question is, are you and your wife still willing to buy the house at even the reduction in price, and are you willing to put the money in to rehab it?
Anyway, Good Luck with your endeavor.