Is it a 5spd or step? If it's the manual, I think that invoice is $39,870 with the options you mentioned. However, with the $3,500 incentive, that would put the "new" invoice at around $36,370 (or about $37,570 with the step. trans).
I'm no expert, but it sounds like you either have a good deal or a very very good deal. To give you some perspective, I took delivery of my 525 in June (after months of shopping) just before the incentives went public. I'm looking at your offer and kicking myself that I didn't wait one more week.
I'm working off memory (that's scary) so don't hold me to these numbers, but I think that MSRP for your car would be around $44,000, with invoice being around $40,000 (there are websites out there that will give you these actual numbers, so double check). BMW NA instituted factory-to-dealer incentives (rebates) in June on the 5er. For the 525, it's $3,500. That means that the dealer can sell you the car for $38,000 (2K below invoice) and still make $1500 profit. Sounds like your dealer is willing to share the incentive/rebate with you, as most are doing now.
Since your dealer is offering the car at ~$37,000, that sounds like they are giving you almost the entire $3500 dealer incentive. If I'm looking at these numbers right, then you can't do much better than that.
Sounds like they are giving you all of the incentive and then some. Doesn't seem like you can do much better than that.
I got my 525 for about a grand under invoice, and at the time I thought I was stealing it from them. Of course, I didn't know about the incentive. I learned about it on the morning that I was taking delivery. I felt that it was too late to renegotiate by then, especially since I had already lost one car that was sold out from under me and I put a bunch of dealerships (and myself) through hell to find another one with the exact color combo and options that I wanted.
I love my 5er. You will hear that the 525 is underpowered. That's true. I didn't care. My last two cars were sports cars, and I needed a sedan to accommodate my growing family. The 7 series was far too expensive and the 3 is too small for us. The 5er is just right and gives me enough power to get by. I mean how much power do I need to commute to work or drive the kid around? If I could have afforded the additional ~4K, I would have gotten a 530 and ended the debate. Nonetheless, I'm very happy, which says a lot b/c I even had to get it serviced after only one week (purge valve had to be replaced).
I think that the handling, braking, fit/finish are fantastic. I'm functionally illiterate as far as cars go, but even I can feel and appreciate the difference. To top it off, it's a gorgeous car with classic styling. Man, I've become a shill in just one month of ownership.
Bottom line, it's your decision. I would have preferred the 530, but that's just me. I don't know what your driving needs/wants are. Have you test driven it yet? That should answer all of your questions right there.