Water in basement on final inspection

[Steven Fischer]

I found water in the basement of the duplex I'm set to close on tomorrow morning.

Water is leaking thru cracks in the foundation blocks and running across the basement floor to the drain. Our home inspection reported that we needed tuckpointing and grade correction, but the foundation was straight and dry at the time (of course, there was no water source / melting snow at the time). I asked a lot of questions of the inspector and was satisfied that it was "old" staining and a minor issue. 

The seller is being beyond difficult. They claim this is not a new defect, that we were aware of the issue due to the inspector's report. They are refusing to allow my contractor to inspect, and are not budging on the price. They have already allowed about $8k in closing credits/price reduction for about $30k in deferred maintenance. I still like the house, but the prospects of another $10k in foundation work is beyond my comfort level.

If I back out I put my $10k earnest money at risk. The clock is ticking and I need to make a decision this morning. I have consulted with my attorney on the prospects of getting my earnest money back. He feels the presence of water escalates the situation and should be construed as a "new defect".

What would you do? I like the house, and am willing to spare the headaches. It's not a great CoC deal - but is a solid long-term equity deal. Our market is beyond hot and the house is in the neighborhood I want for future good rents. Am I getting in over my head? Will I get my earnest money back?

Thanks for your insights. Arghhhhh!