This is a much better scenario than butting heads with the seller and ending up with him selling to the back-up buyer.
Good luck to you - I hope your agent can negotiate this for you.
With a back-up offer, the seller is in a position of negoatiating power. My hunch is that they feel like they've given all they are willing to give. Pushing the seller to paint the house, in addition to the repairs they have already agreed to make, will likely not get you a desireable result, unless you were to renegotiate at a higher sale price, thus giving the seller the extra funds to have the house painted, and asking the seller to have it painted. This can sometimes be a tricky negotiation. If you are working with a real estate agent, they should be able to help you through it. If not, I would suggest taking the built in equity ($7,000 under appraisal) and getting the house you want.