An he knows this? There is more to this story then is being told is my take.
Either you are right about him covering something up, or he does not think you to be a valid buyer.
Either way since the two of you are arguing about it I would simply walk away. Both from the seller and buyer point of view.
On Edit:
If you really are that serious about buying it after seeing it, then write up the purchase agreement pending a water system test. The seller knows he will have a definite sale because he has nothing to cover up, then why would he say no.