Not worth the hassle and once the buyer is spooked about a possible exploding water heater, it won't matter whether YOUR  interpretation of the code is correct or not

This town is full of competition but don't let that spook you.

That is what spooks me.

With contingencies, that is a fair offer that would let me renegotiate or walk away if I found something that spooked me.

Even the guys that do collateral lending get spooked by foreclosures, especially funding a redemption period retake knowing they could be next if you dont pay them...get the numbers attractive enough you might find some private lenders to pull the trigger, but I'd even cringe at that one and I'm a risk taker. 

Also the conditions he described spook me a little bit but perhaps it's a deal under all that.

The space heaters may be a temporary solution if it takes a while to fix the furnace, but it seems that you are a bit spooked by the whole situation and fear another leak will happen again.

Said "inspector" (read roofing and siding installer) said, need to replace entire siding and roofing, basically spooking the buyers.

He is probably some weirdo from Ukraine with whole bunch of guns in his closet

He got spooked by the $650 a month HOA fee and chose o buy a condo much cheaper in SC.