I wouldn't of laughed if I'd been selling it (especially since he was older, and ended up buying an expensive horse) and I would've been offended if I'd been in his shoes and laughed at; in fact, I'd of left without another word and not returned.
How old was he? A 50-year-old has no excuse; if he was 70, he may. My 70+ year old grandparents (and my more sheltered 58 year old uncle) are constantly surprised with how much things cost now, and very well may of offered a similar amount on something (not even nessacarially a horse!) much more valuable. It also may of been a bargaining tactic; he probably knew you'd say "no" and the next words out of his mouth would've been, "how low CAN you go?"
As for the quality of "cheap" horses (or what someone will do with them), it truly depends on the area. For example, in Texas, you cannot buy a horse that is NOT a small, heinz-57 mutt with behavioural problems for less than $100; and IF you get a $100 horse, it'll need groceries and work; on the other hand, in Indiana, it IS a buyer's market, and you CAN get broke horses from $500 and under. If you know the auctions, you can get good greenies and unbrokes for a lot less.
I have a friend that bought a well-broke, gorgeous App. that was 12, lightly scarred and had light arthritis for $25; it was a lesson horse, it was a light-riding horse, but it was a GOOD horse over all. The market is **** here. He sold it again to a friend, and with good diet and medicine, her new owner gallops from his house into town a few times a week and then back.
You can luck out.