Hey all, a quick update: I have the engine back.
Like I wrote earlier, the seller offered me a full refund right away, but I asked him to check out the engine and see if it's worth fixing instead. If it is, he still has an engine he wants to sell and it's still an engine I want to buy.
He tore the block down and it turned out to be a problem with the #3 rod bearing. The whole idea was: if we can rebuild it at a reasonable cost, we'd do it at his expense, and if not, he'd give me my money back. After getting quotes from the machine shop, we decided to move forward with the rebuild. He had the crank and that one rod reconditioned, honed the cylinders, and reassembled the engine with new pistons rings and new rod and main bearings. Along the way, we exchanged lots of pics and ideas over email, and learned that the crank's knife-edged and the Ross forged pistons have a bit of a dome to them, giving us more confidence the engine's worth saving.
I installed it yesterday (with a fresh oil pump), put on all the ancillaries today, and fired it up tonight: