take some interim steps before arbitration, you can wait to see if they file for arbitration. Then hire a lawyer.

Spending money to send a demand letter is nothing. It is an orders-of-magnitude greater investment to file a complaint and start down the litigation path. Their lawyer is telling them they have an uncertain battle but it costs very little to send a demand letter so let's see if we can wring a response out of the guy on the cheap.

What's the worst that can happen? If they ultimately get rescission, then you get the house back and can sell it again. If they are right and are entitled to this, you'll just be wasting money on legal fees anyway and still have to pay the expenses of selling it again too.

If it were me, I'd hold off spending the $ until they show they're serious.

(Caveat: All of my advice is wrong and should not be followed under any circumstances.)