How do you get the "real" feel of music?

Beetle a dynamic range expander is just another 'fix' (like Eq) that you'd be better off without, keeping the signal path cleaner & simpler; 2 fewer pairs of cabling for the signal to go thru as well, not to mention their extra cost. But if you want to try one I'll 'loan' you mine; it's been out of my rack for years now. It's a Phase Linear model 1000; shoot me an email if interested. I used to use it for fixing up bad tapes when I did some vocal-cassette "production-master" dubbing jobs.
Regarding your bright room-response; yes you've pretty much figured out the reasons why - too many reflections. Wall rugs, floor rugs or carpet, stuffed furniture, window treatments, those basic sort of things can help a whole lot.
Yes you want greater dynamic range; speaker replacement will go a long way to getting you there. Cabling synergy & some other tweaks will also help, but I'll not get into that right now as you really need to address the basics first.
Your speaker budget mandates used equipment to get much of anything decent, but hey that's OK. Many of the above suggestions are certainly worth exploring.

An Expander is the *opposite* of what you want! Most live music today is played through a PS/SR system that has both dynamic limiters and compression. Expansion will make your system sound *less* dynamic for 99% of the program material!! (it's the opposite of the intuitive for this one)

There are two main things to gettting a "live" sound in your room:

1) bandwidth - you need a lot of bandwidth, especially on the bottom
2) output - you need enough output with low enough distortion at the high enough level.

These add up to: low distortion at peak levels.

Then you need really GOOD recordings and signal chain to get them to your speakers.

Keep in mind the size and space of the venue that you are hearing the "live" music in. That makes a *huge* difference in the perception of sound!! IF you really want a similar experience you may need a physically larger listening room, and there is no direct substitute.

It is true that a good horn system (not all are "good") will have what I call "jump factor" out the yin-yang compared to other speakers. This can be one way to get more "life" into the playback, but horns too generally sound better in larger rooms.

Small speakers alone generally do not give a "big" sound with high impact because of limited headroom, distortion at higher levels (peaks too) and limited LF response.

Getting the sound of live acoustic music and voices is the holy grail of hi-fi anyhow, and it is extremely difficult to even get a good facsimile thereof...

Welcome to the world of audio! :- )

Bear is of course talking about dynamic range in his first paragraph, and how if you were to use an expander on a lot of the compressed and limited material available, you would wind up with quieter "quiets" for a majority of the playing time. But his comments also happen to point up the fact of what a grotesque parody of "natural" sound most electronically reinforced "live" concerts present today, something John Atkinson commented on in a recent column.

But if you're familiar with (and listen to recordings of) naturally produced acoustic music, perceivability of the really quiet events is definitely a good thing if one is trying to achieve "live"-sounding results. For this you also need low noise (high S/N ratio). This applies not only to the system, but to the listening environment as well. Low-level detail can be easily masked by ambient noise.

Bear's point about system headroom and room size also bring up another aspect, which can be called "absolute volume fidelity". Too often in our systems, it is just easier to ignore this, but for naturally recorded music, you really must be able to reproduce it at the same volume at which it was originally played. The illusion of "live" cannot genuinely be approached otherwise, and this only makes sense. But for something like a piano or a horn, this requires a lot more power than most folks realize not to compress or distort the instantaneous peaks, and your room must be of a certain size, and preferably acoustically treated as well, if it is also not to overload on these and give away the game.

Finally, I would like to point out that while seemingly not high on the priority list of most audiophiles, and not yet attainable for most program material anyway, recreating a believable, immersive soundfield through some sort of multi-channel record/playback scheme will do as much or more to address the "live-like" question as any of the preceding can. Sorry to repeatedly wander so far off-topic on the thread-head's question about how to accomplish "live" given a modest system in a small room without scrapping it all, but I don't know how to do that, so I ramble instead. }:-(

The closest I have been able to come to live music is with Stax electrostatic headphones. Headphones are not everybody's cup of tea but if you haven't heard them, give them a try

Well Beetle, I guess if you want to "sharpen" your sound, horns are the way to go. Not for me... Tom