First deal analysis, after home inspection. Should I walk away?

[Robert Hubbard]

Hey all, 

     Got an offer accepted on first deal and after having the inspection I'm second guessing the purchase so I will break it down.

2 unit 4bd/2bth upper and lower 

PP-130 with 25% down

Originally seller wanted all cash offer for 124k.  They were worried the place wouldn't pass bank inspection.  Cash offer pulled away b/c it has a shared driveway.  They now opened to conventional so I offered 130 with a 2 month post occupancy (they are currently looking for a house to buy).  Inspection revealed that the service line from outside to the panel inside the house has a lot of water damage and you can see the calcium deposits on the breakers.  Looks like its been an issue for a long time.  House also has a single car garage but its a complete loss as the foundation is compromised and the whole garage has a lot of structural issues.  I'm fearful that the garage if knocked down will hurt appraisal in the near future.  Both furnaces are over 20 years old and showing signs that water is getting into them-very possible the chimney needs to be repaired. 

I don't want to lose the deal but struggling to find a way to make it work.  I plan on going back to the sellers and asking for some sort of either price reduction or credit.  Good chance they'll tell me to pound sand.  Any insight or advice would be greatly appreciated