Mark,
OK, so I take it that it still requires a lot of work to put it right. Can that be done or is it a bottom less pit?
When you say sell it for 5K, I would have thought that the only reason you would see it for such a low price would be because of the issues with it - meaning, you would inform the buyer, right (hence the conscience bit doesn't come into it at all)?
At the end of the day, if you can put it right (and can put up with the troubles along the way), then I'd go for that option, cause the amount of effort you have put into the car will eventually pay off....