Well, he wants to get paid.
You'd agreed to pay $1,000. He's willing to accept $700. You want to pay him $500.
I'm surprised that a lawyer (or even you) would operate on a verbal agreement. Those things ought to be in writing. However, since that wasn't the case . . .
He's saying that he did about 70% of the work that would have been involved if you'd purchased. You're saying he only deserves 50%.
Personally--I'd pay him. You're not that far apart. Only $200, regarding payment for his services. He's a lawyer; you're not. If he puts up any sort of fight and you have to go to another lawyer, it'll cost you far more than $200.
As for whether the money should come out of the downpayment or separately, your lawyer is afraid you're going to stiff him. You'll get all your money back, then you won't pay. That's his concern. And really, you're going to pay him out of the refunded downpayment anyway, aren't you? If not, then why not pay him now, and get the full amount back. After all, he's already done the work. But he's willing to wait for payment until you get the remainder back. That really sounds like a reasonable arrangement.
Hope that helps.