Taylor,Lemon is a very harsh word.
No mention was made of problems with the REALLY critical parts (boiler and running gear. Nobody, except maybe a rich idiot, is going to buy it without making a thorough inspection, and hopefully even an ultrasound.
Yes, these are serious problems, that will require attention before putting the engine into regular service elsewhere. But they aren't as critical as, say, a warped crownsheet, a thin barrel, or a twisted frame.
Is it overpriced? Maybe, it is worth at least its scrap value, at most whatever somebody is actually willing to pay. That quarter mil is an asking price, the actual sale price usually depends how well you can dicker. Having information on the known "irregularities" will give the prospective buyers a little more leverage when attempting to negotiate a final price.
A lot will depend on how many people are interested enough to bid. When I bought my traction engine, the asking price was $7.5K, I paid $5K, and discovered later that if I had held off about another month I might have gotten it for even less...OTOH another buyer could have turned up in that time and offered more.