Need some advice quick; tax returns vs listing information

[Mark Devereaux]

I've been looking at a 16 unit building for a few months now. Price started at $440,000. The day it dropped to $300,000 I went to look at it and put an offer on it.

The seller represented the following in the listing:
$81,320 revenue
$26,220 expenses
$55,100 NOI

Which, of course, I didn't believe, so I forecast the following from what information I could put together. The seller would not give up tax return numbers before making an offer (I think I know why now):
$73,180 net revenue(10% vacancy)
$40,700 expenses
$32,480 NOI

After talking with my commercial banker, showing him the property and numbers, he told me the historical data was showing 9-10% cap rates for the deals he was doing. We applied that, came up with about $320,000 as a relatively conservative value. The banker ran our credit, looked over our personal financials and said as soon as we had a PA he would get the ball rolling for a quick approval. 90% LTC, 80%LTV at about 7%.

So we wrote an offer for $280, which was countered at $295, which we accepted with a 60 day inspection period and sole right to terminate. As a condition, the most recent 3 years completed schedule E were required. So we got the tax returns and this is what they are showing for 2006:
$61,107 net revenue
$45, 633 expenses (before depr)
$15,474 NOI

Today I requested all supporting documentation they have. This seller would not give anything prior to making an offer. I thought I did a pretty good job of estimating the conservative value.

Did I just make a huge mistake and should I walk away, or do I need to investigate these numbers futher and see why they are so different than what the seller's agent originally represented? There is only one vacancy right now and the seller's agent claims rents between $415-$430.

Would it be normal for a property owner to hide about $12K in revenue and overstate expenses by such an amount? Should I ask the seller that question?

I know you experienced guys/gals wouldn't have gotten here in the first place, but what would you do now?