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If you can fix it for $1K, why fight?
We've had almost exactly that kind of damage -- water heater leaking into the kitchen. If the floor started warping only after you moved in, then most likely it had not leaked into the kitchen by then. Honestly, when this happened to me I stood around for days before I thought to check the water heater. So the owner may be clueless.
You may also want to check that the water heater is the only source of leakage. I can't believe that the heater itself has been leaking for years -- enough to damage the studs and drywall -- _without_ water leaking into the kitchen before now. Yeah, the old owner might have covered up an old, damaged floor with new hardwood. But if you're going to go to all that trouble and expense, you might as well fix the problem.
Anyway, we had a leaking water heater that warped the kitchen floor; fixed it. Then, a few months later, discovered stained wallboard and rusted nails elsewhere in the utility enclosure, up where the central heater sits. We had a contractor rip _that_ wall out, and he found a decayed stud next to a water line with a _very_ slow leak. When the house was built and they ran the pipe through the frame, somebody probably nicked it slightly with a nail from a nail gun. And it sat there, dripping slowly, for 15 years. Check for stuff like that while the work's being done.
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