Having said that, you made a decision to buy your "dream home" based on what was likely a diligent and careful search. You have seen all of the other homes that were available on the market and decided on this one for some very good, solid reasons. Trust your initial judgement.
Although four thousand dollars is a lot of money, compared to the "deal" that you are likely getting on this home it is insignificant. 2011 is the year that all buyers will be looking back on and saying; "I should have bought that seashore home"! So, just buy that home and rest easy.
Inspector's estimates are probably very conservative, worst case scenario. The real cost, if you shop around, will be, most likely, less by 30% or so. Unless you are just looking for the way out, are you really ready to loose this house and start all over? You can counter owner with $3000 and see if you can settle @ $2000-2500.
The question is are you looking to get out of the contract and start over on your home search and go through the entire process again? Are the steps so dangerous that they need to be replaced right now? Who gave you the estimate of $4000 to replace?
I would suggest geting the proper licensed individual ASAP (i.e.: mason if they are concrete/brick steps or carpenter if they are wood) to give an estimate of the replacement costs, then use that as your leverage to get the seller to compromise on half the costs. But even if they still only offer $1000 is it worth it to lose the house at this stage of the game?
Usually a contract settlement date is on or before a certain date, and you have about 10 days leeway after that date to close before time is of the essence kicks in. However, It seems a bit odd that this inspection issue was not resolved till so close to the closing date.
If you are not using an attorney, speak to your Realtor first, but you may still have to get an attorney involved if you cannot come to terms with the sellers and want your $$ back.
Work within your purchase agreement. Most contracts will specify a definition for, limit to, and guidelines for repairs. Unfortunately, this often reveals another layer of negtiations that can be difficult.
Again, whether or not you can get out of your agreement with your escrow money will depend on the terms of your agreement. Your document should be reviewed carefully. Additionally, at this point, it may be necessary to have an attorney support your efforts.
Welcome to Trulia Q and A. Most real esate contracts have a home inspection contingency clause which says that your are entitled to a timely inspection. You are obligated to make timely notice of your requests (if any, and most should be about items that are either not functional, a safety concern, etc), which is sounds like you have already given timely notice and that the item you are describing is a safety concern. Although, I do not know the full details of the contract. I can say that it would be best to discuss the matter with your real estate attorney.
I know that in certain parts of NJ, the use of an attorney is not customary. But these are the moments where an RE attorney can assist in your contract negotiations and explain the appropriate steps to follow.
Failure to come to terms on a item on a home inspection, can be grounds for cancellation and depending on your individual contract terms, you may be entitled to full return of your deposit money. Again, every contract may start out the same, but could have changed during your attorney review period.
Since you're in South Jersey you're probably not using an attorney. If that's the case check with your REALTOR and go over the home inspection section of the contract.
If you have an attorney, speak to him or her.