There's more risk for new buyers, but not a moral issue. 

In this case, the deposit was increased to $400k which would have been the down payment to the Seller anyway.

Either the amount of renovation won't increase the after renovation value or sellers are asking fair market price without any room to negotiate.

So, I am thinking of couple of strategies.1) To sell and reinvest in other properties, i will have to do a 1031 exchange since it has been about 5 years since it has been my primary residence.2) continue to rent it out and wait for value to increase further.

If the values had increased they might not have needed the second.

Even if market values only increase with the value of inflation (2% compounding), a $185k property should net a $40k gain.I suspect that 25% vacancy is right about break-even for them, assuming the same 8% CapEx and 12% Maintenance and Management costs I used in the other models. 

The below chart shows ALL 20 cities increasing for Nov'17, year over year.

I don't know much about that market but I have worst situation here in my neck of the woods, so I would say 8% cap with 11% COC is much better, but then you have to weigh in other factors and see if you can either increase the COC by lowering cost or increasing NOI thru some value add.

If you can take a reduction today, I can buy the house before it goes to foreclosure and you save the foreclosure expenses and risk of it going to the city if it doesn't sell.They might be more interested if you want to increase the tax value, for example if you want to build a house on it.Otherwise you have to wait until it goes through foreclosure and you never know when that will be and at what price. 

Moral of this story for me is never take no for an answer.