I've made as little as $500 when the deal was skinny and as much as $65,000 when it was fat.

Get an estimate of that work and ask for a reduction in price based on that.

Questions:1) Is it safe to assume that disputing the square footage will yield a proportional reduction in the town's assessed value of the home?

Everything from getting loans, insurance, appraisals, tax reductions etc gets complicated if repurposing.

Sure...there is no equity being built however the mobility and lack of repair risk is well worth giving up the $400 a month in principal reduction.

If the property still won't appraise for asking price I would try to get a reduction or move on to another property.I would not settle on this one. 

Easy to fill = less reduction in value and vice-versa.Another point to consider is that when you hold stock in a company and that company goes under, your stock certificates are only good for lighting the fireplace - you have nothing against which you can foreclose or otherwise recover even a portion of their former value.

This is a 1/3 reduction in lot size!!

I have noticed an increase of price reductions, short sales and foreclosures in the last couple of weeks.  

I would like the opportunity to present your property to them for the next ( 30/60 ) days and if at the end of the time I have not been able to secure a buyer, we can part ways as friends or we can look at a possible price reduction.