In some places,the buyer can return something within a few days and cancel the original deal with no penalty,check local laws.
I myself would get the engine apart and I would cover any and all engine labour myself.While I had the engine apart I would "CSI" the engine.If I figured the engine was abused I would still supply my own labour for free and show the fella how it works and how it should be done correctly.
My thoughts about an engine failing at 500 miles is something was done wrong,,,, A stock flat tappet cam engine should not be able to over rev even in neutral.
Parts costs? after taking the engine apart and figuring why it failed I would decide then.If I had zero doubt he ruined the engine,I would tell him what and why and put him in the spot with a chance to come clean.Maybe he would buy all the parts.If I had a doubt as to if it was my fault,I would piece meal a stock engine together using a used short block and would have the fella do a lot of the work putting it back together.
You have an opportunity to be a hero.Here in Canada the minimum costs would likely be 50/50 and at a facility it might be cheaper if you step up and help.If you play it right you might just do the rebuild labour and at the same time teach the future generation 2 things:
How to fix something with a little knowledge about looking after something
2 and this is a big one,INTEGRITY,even if its not your fault,maybe he will be like you in the future,
or maybe he will be like you in the future if you walk away from him?