This is such an acrimonious situation....what's to stop the seller from trashing the place in retaliation. I have seen way too many properties that the sellers have destroyed in similar situations.
If it were me, I'd probably hang it up and look for something that doesn't have the this type of problem. Bad enough you're buying a foreclosure which is typically as is where repairs and replacements are probably lacking.
Unless you have a better egg to sit on in the meantime, I would stay and see how it plays out. If staying were to cost you additional money or lost opportunity elsewhere then you have a tough decision. You have a bona-fide contract, which in this extremely tight inventory is hard to get.