$4000 seems a reasonable bidding price. The seller may believe it is worth a little more than that b/c the replacement engine only has 5,000 miles on it. If you are satisfied with the warranty terms for the replacement engine then it probably doesn’t make sense to nickel and dime. 160K miles w/a nearly new engine seems a good bet for a reliable AWD ride in that price range. Hopefully you can come to a price agreement with the seller roughly in between. Good for you for getting it inspected by your own mechanic first. You got your ducks in a row.
I looked up the price for a 2008 Base Legacy on kbb, and they say the sales price is between $4000 and $5700, averaging $4900. You didn’t say what the options are or the trim level; I picked the lowest trim level. While the car has 160,000 miles, the engine is new, and that should add something to the value. It looks like $4900 is a fair price.
Thanks! I just bought the car for $4900 and drove it home! I am a little nervous since it is my first car, but the mechanic who did the inspection said it looked in good shape. The dealer said he doesnt do warranties since he rebuilds engines himself, but if I happen to have an issue, replacing a motor is around 4000 dollars, so I should bring it back to him and he will replace it for me. I also talked to someone who knew him who said the dealer is reputable, so hopefully I am safe 
It’s a very beautiful car, so I will post a pic when its daylight! Thanks for all your help on the forum, it gave me more peace of mind
Congrats on your purchase and hopefully it will give you a long reliable transportation.
One friend of mine used to run Subarus to 250-300K miles (mostly highway) before disposing it one way or another, so hopefully you are to get years of service off it.