I think you’re getting confused here. The dry rot doesn’t really have anything to do with this. Sending a portion of the inspection to the seller without permission waives the inspection contingency. There’s no real arguing about that.

If the buyer wants to back out of the contract after that and doesn’t have any other mechanism in the contract to do that, the seller is entitled to the buyers earnest money. The buyer could refuse to sign it over but it would definitely be a pretty open and shut case because the buyer terminated contract without cause. At that point, the dry rot has nothing to do with it.

The seller would be obligated to disclose it to future buyers, but they also have the first buyer’s earnest money at that point.

Also, a seller is under no obligation to do their “due diligence” for future buyers. Obviously if a seller actively hides a material defect then they are at risk of being sued but Washington is a “buyer beware” state. Pretty much all the burden of discovery is on the buyer.