I'm damn sure no expert. But after dealing with my lawn for years I'm of the opinion that tilling is a great idea, but remove all the damn rocks you find. Add whatever amendment is recommended (manure, peat moss, etc.), and till that in again, the de-rock again. I'd want to rake it out smooth and level, fertilize, and then put down sod. Gotta have a solid sprinkler system first of course.

This is only my opinion, not experienced advice! Our yard has good grass because it was sodded and I fertilize, but it's rough and lumpy as hell, which tells me it wasn't tilled, de-rocked and raked. It's a bitch to mow because it's so lumpy, and the above is my pipedream about how I'd like to fix it. Typical Richmond American mass-production house/yard. Get it done and SELL IT!