The advantage to the Seller(s) is that the Buyer's will not have an ability to cancel the escrow and get their 3% inital good faith deposit back. Based on the Buyer's offer, they're saying they want to buy the home no matter what. While the Seller(s) are still obligated to disclose "known material facts" about the home and the neighborhood, the lack of Buyer contingencies removes their ability to cancel the escrow based on their inspections and Seller disclosures, without losing their deposit and opening themselves up to potential legal issues. This puts the Seller's in a very strong position right away. In my professional opinion, I do not see the Buyer's complaint about the flag. Unless the Seller's have had direct problems with their neighbors, then there is nothing to report. Discloure involves only "known material facts". While the flag is highly offensive, it is not illegal to fly the flag. Disclosure laws do not obligate a Seller(s) to make assumptions as to the character of their neighbors. Furthermore, the Buyer's had every opportunity to observe the flag when they first pre-viewed the home and with each subsequent property inspection they choose to have after they made an offer.
That being said, I'm not an Attorney so should you have any potential legal questions concerning the matter then you should consult an Attorney that specializes in Real Estate law. I hope this answers your question. Good luck!