If you walk away, where does that get them?
I would negotiate. Look at the back up documentation. It's better for the HOA to get something rather than nothing. If you walk away, they get nothing (until they find a buyer). Why should you, the buyer, make up for someone else's mistakes. It you close escrow, they start collecting their dues right away. For every month the condo sits vacant, they lose.
The counter offer states one pay off that conflicts with the final pay off demand. If you want out of the contract you can use that as a means to cancel and collect your deposit. I know it all appears to be very unfair that you would have to come in a mop up the former owner's left over mess. And many buyers can't just pull money out their hats like magicians do with bunnies.
It is up to you whether you feel it is worth the extra amount due or not. That much you have control over. Many times we find estimated pay off amounts to be different from the final demanded amount. In this market, personally, I would encourage you to just pay the freight and enjoy your condo. In my area here in the Socal San Bernardino County I have hands full of clients that would love to be in your shoes. To finally be that close to actually closing a purchase escrow is what they can hardly wait for. Count your blessings. Best of luck to you.....
Diane Wheatley, Broker
First Weber Group
Certified Distressed Property Expert