Many confidence builders are bought and sold, because there just that, a confidence builder. A lot of people buy older horses to do the simple things on like walk/trot, then once they have gained there confidence and foundation of riding experience on said horse, he/she is sold off so the owner can follow the discipline they've chosen. I've done it myself, I owned an 18yr.old Qh gelding who was dead headed and lazy. But he boosted my confidence, and I moved on to something that had more get up and go. Most confidence builders are older, been there done that horses, who just put you on the path you want to go on. You can't expect a horse who just mozzys on along the field barely trotting to be your next hunter/jumper or barrel racer. People advance, its not that uncommon at all.
I would be leery of the hair falling off, and the eye not fully opening?? Certainly get a vet to examine him, also, not sure where your from, but.. if he's a grade horse (cross bred??), 16 years old, and just a good ole confidence builder, im not sure why she's expected such high dollar for him? If he is trained for something IE: western pleasure, reining etc, then I do agree with Joe4d why did she out grow him instead of saying she wants to ride a different discipline? I could understand if he has no real formal training for anything and she wants something that is, but then that horse would just be every other backyard type horse going for $500. I understand she's your friend, but don't let her haggle you into a steep price that this horse really isn't worth. Just my 2 cents ;).