The other thing to bring up is that this damage is vandism and ask if the bank has filed a insurance claim with the forced place carrier and what is happening to those proceeds. I would still push back with the bank to indicate that it is not in the same condition and at least the proceeds from the insurance should be given to you.
The other question is how much earnest money you have deposited and your williness to walk away from those funds. The likelyhood of the bank sueing you for specific performance is not great. The bank could demand you finish the deal but there incentive is to close the property quickly and not delaying the closing. For them to sell the property to someone else, they would have to sign a release of earnest money; giving you, your earnest money and letting them sell the property to someone else.
But legally look at the contract and the reo addendums to see your legal rights. Then evaluate your options on the amount of work, why you really want the property, and the posibility that the bank will sue you for specific performance if you do not close. You may have to check with an attorney if you decide to walk if the contract limits that option.
Providing, of course, that you didn't sign any REO addendums that override that clause. Check your Offer paperwork carefully.
It's a shame you didn't have a Buyer's Agent representing you on this!