i DON'T think you should back out, because the title insurance will get you back that piece of land: they will demolish the existing fence, and will built a new one on the right location, out of their pocket, and your future neighbor will be compensated for the loss of that land strip. Just make sure that you have the seller bought the title insurance for the final close. Our neighbor won back their lost piece of land strip, without paying out a single dime to anyone, in the same situation as you are in but after the sale.
As a side comment, you should not confront your future neighbor yourselve.
