I still say he gambled.... You told him it runs.... He bought it... He should have said "as long as it checks out" or spent 15 min to do a compression test if he wanted to cover his hiney...
Don't get me wrong, I'm not down on him and were I in your place I might choose to take care of him too.... Not having been in the room for the negotiations I can't say what he should or shouldn't have assumed...
As said it was an old ratty used up motor.... What did he expect.....
Never know he MIGHT still be satisfied with the deal....
If the LU controls prop and starter are good there's your $500 right there.
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