My brother in law just picked up an 06 Maristar 215 for $27.5 on a tandem axle trailer. It was really dirty, has no tower and has MC cruise not PP. For that kind of cash he can afford to do a lot of upgrades, cleaning and has a boat that will be worth more down the road. To find this boat we spent a good 6 weeks looking at overpriced thrashed boats in the fall when prices should have been at their lowest without much luck. My point would be that there are deals out there if you're willing to spend the time and effort look for them. If you want the smoking deal you will probably have to travel to get it. A lot will depend on that balance between what your time/effort is worth in comparison to the cash you want to spend.
As far as what that boat is worth, I'd say he's in the ballpark especially considering that it's local to you and at a dealer that will ease the transaction stress. Used MCs are going up in value and comparing pricing from a couple years ago during the down turn is not going to reflect the accurate price structure in today's market. NADA and BUC value guides are just that, guides. They're typically under value for high end ski boats, don't put enough value on truly excellent condition boats and are slow to pick up on market trends.
As far as size for your family. My wife and two small daughters (5 and 11) spent 2 seasons with an open bow MC TriStar 190 which is not that far off from the 197 in size/class. I bought this boat after owning a 17' Cobalt which my wife loved. The Cobalt was roomy, deep, dry, safe and very comfortable. The TriStar in comparison was cramped, wet riding and had little free board which worried my wife to the point of pushing for a change or getting out of boating all together. I was able to get us into a MariStar 200VRS and all was right with the world once again. The 197 will be fine if you live on the lake and don't have to spend all day on it with the family. It's just not that kind of boat. The relatively low free board. limited storage space, small cooler, small bow area and hull design which makes it such a good ski boat will also limit it's big water capabilities. When looking at this boat you will need to set realistic expectations as to what it will and won't do. Take the family back to see the boat and have everyone get in the boat with you. Now imagine adding all the gear you'll be taking, a friend for each of the kids, and being on that boat for a whole day the way you feel you'll be using it. Now as long as you're there go sit in a v-drive boat and compare the difference.
As far as the Malibu goes.... Malibu's are fine boats. I definitely prefer my MasterCrafts but I have friends with Malibu's and they have been reliable and I will say neither have experienced the issues with interiors that I've seen with the MCs in that same time frame. The Sun Setter is a little bigger boat so you will have a little more room however all the laws of physics still apply. It's still a direct drive inboard, has limited storage/amenities and will have limited big water capabilities. It's going to be a good skier but put 6-7 people in the boat with all their gear for a full day out on the lake and you will find yourself pretty mcuh in the same place as the 197.