I could see me looking at this boat on the hard with varnish pealing and say, I'll offer 10 and see what happens.
I'd offer to do the varnish work which he hates to do and bumps up to 13.
It sounds like you're not getting much interest, and that's why you're wondering if you should have responded to the "lowball" offer.
From the point of view of a buyer, I'd look at comparable boats. Yachtworld right now shows 70 Catalina 27s for sale with brokers. Of those 9 are above $17,000 and 61 are below your price. Median asking price looks to be right at the $10,000 this fellow offered.
So, your boat is one of the most expensive C27s on the market. Is it worth that? Again, as a buyer, when I see peeling varnish, it screams (to me, anyway) "NEGLECTED BOAT!" If the owner has let the varnish get this bad, what else has he neglected is the first question in my mind. The second question is how much potential hidden expense is there in this boat, and the third question is why don't I just buy this other better-maintained C27 with the lower asking price?
There's lots and lots of fixer-upper sailboats out there. If that's what you're trying to market, and you've got the skills to convince someone to pay a premium price for a boat needing work, then entering a negotiation with this fellow might have been effective. On the other hand, given that it's people in the lower- to mid-range boat market hurting the most with the current economy, there just may not be many potential buyers with lots of money to spend on an older boat that needs work.
It sounds like you're willing to redo the varnish. So why not do it? The vast majority of sailboat buyers can be scared away by first impression cosmetics. The ones who realize its just cosmetic issues are the ones who know they can get the same boat for a lot less money somewhere else.