Update. They offered back 4k and that was it. After putting a lot of thought into it my wife and I called our Realtor and turned it down. After some discussions with our Realtor he asked what it would take to make us say yes, and he told him 5k and the water heater replaced, he said he’d get that done one way or another, either having the seller accept it or him paying for the extra 1k and the water heater replacement himself. So we said yes!
It was only about $1,800 difference from what they were willing to offer but it was less then what we had already laid down as what we would accept. Can’t believe we are going to really get the place now! We both felt sick after saying yes, we are really going to be home owners now!