As other posters pointed out, if your offer had been accepted, the lenders do like a clean offer to process, so re-writing the contract would not have been prudent. Cash offers do not in my opinion lend anymore weight than an offer that needs financing other than it might be able to close quicker. If a seller has to vacate a home, they appreciate the longer time to close, it gives them more time to pack. If you offered $3500 off the asking price, that doesnt seem to unreasonable given current conditions, but it all depends on how much they had reduced it previously.
Maybe the seller is at their rock bottom price and arent in a position to bring cash to close. Without knowing more of the details, I really cant say. My advice is to sit down with your agent and have a heart to heart talk with them and have them explain exactly why they took the steps they took and also ask them why they think the sellers rejected your offer. Good luck!