Are all the backlinks still active?

That question highlights what a naive newbie I am, I didn't think to look at that before the purchase. Webmaster tools says most links (60) comes from Flippa??? How does that work?

Have you contacted the seller about it? What did he write in his Auction listing? You can file a complaint if you feel you have been mislead. You can also start a dispute in Paypal but usually you won't have much chance because websites are not tangible items.

You never know with flippa the seller could be boosting the traffic or doing some other type of service to get more traffic... although I dont know how he could manipulate the rankings then see it drop off suddenly.. Your best bet just make the most out of it and try to get some of the rankings back also get the site on webmaster tools to make sure there isnt any problems thats also a start to see what keywords you can work on.

I know one thing though ive sold a few sites in the past and the buyers just dont take care of the site or continue any SEO or promotions and it loses rankings.

Check those back links are they working? In most of the cases people sell those websites which have a huge number of visitors with high quality back links. just after getting the money they remove the back links and put another URL there.
Its a scam i think

The previous owner may have been using a 301 direct from a more authoritive domain. Once it had been sold to you he could of just stopped the 301 and pointed it back to another of his sites to pass the authority to that instead.

There seem to be so many scammers out there at the moment selling websites and SEO services and it's really hard to tell which are genuine and which are not.

I think it's a scam. And no one can influence or manipulate the rankings of any major search engines. But it may be possible that site has spammy links for quick and temporary traffic. Yahoo might caught those spammy links and deranked the website