Lease Option agreement fell apart

[N/A N/A]

Wife and I moved into a house in dire need of repairs....wife wanted the house b/c she wanted a fixer-upper. What needed to be repaired was the kitchen needed to be completely redone (water damage ruined everything, landlord took the insurance money and paid on mortgage), and HVAC needed to be replaced. We agreed to these things, my wife made out a contract and we put down $1500 for the lease-option and paid $250 over our rent as part of the agreement.

Then everything started to go downhill...

We stayed in the house for 1.3 years...moving out this weekend and the following happened in that time...

-took everything out the kitchen b/c it was molded...don't know why she spent the money on her mortgage instead of repairing the kitchen
-taking a shower in the tube and the tub cracked...was an old fiberglass tub
-part of the bathroom floor seemed to be leaning in...let landlord know...but from the smell it seemed to have started rotting the beams below long before we moved in
-house ran on screw fuses and half the house was on one circuit...fuses were constantly blowing and the house nearly burned down b/c the wrong type of receptacles were installed throughout the house
-went to get the HVAC checked out and the whole system need to be replaced, but would work b/c the entire electrical system in the house need to be repaired first (which was not in the scope of our agreement and let the landlord know)

In the end, everything fell apart. We let the landlord know these things and asked for our $1500 back for the lease option agreement b/c what we agreed to could not be done unless she did the necessary repairs first. She refused and we decided that made the contract null and void. She said that the contract was illegal anyway, and that we need to do the necessary repairs to the kitchen before we move. We declined to do so because since she called the contract illegal and will not do her part in keeping the place habitable (I know we were there for 1.3 yrs) by repair the electrical and we're not going thru another hot summer b/c we can't install the HVAC unit w/o the electrical being done.

but now she's selling the house but no one is interested for her asking price because her mortgage is about $40k more that what the house is actually worth and she bought the house as a rental property knowing this...actually she owns about 4 houses that she is trying to get rid of b/c she realized that she got in over her head and has no $$$ to repair any of her property...I bear no ill will against her b/c she has helped us out a lot, but I feel that we should get our$1500 back because she made the contract null and void b/c she refused to do her part in fixing the electrical

any help? are we in the wrong for asking for a refund or even entitled to it?