I want to know why your inspector didn't notice the well, why the previous owner didn't disclose it to you, and what other surprises you're in for. Call your real estate agent right now, and do as much damage control as you can. God knows what kind of structural nightmares weren't disclosed.
As far as the hole itself, is the riser tube that goes up the side of the house possibly a downspout for a gutter system? It sounds like a rainwater collection chamber, or a drywell, or cistern, like you thought. I don't see any reason not to use it for watering your lawn, except that the cost of installing equipement to pump it out with, and not having enough water on a consistent basis to make it worthwhile.