The film's official novelisation indicates that both Owen and Luke did recognise the R5 unit as a "semi-agricultural droid", similar to an R2 unit in all but its attachments.
Apparently Owen Lars had already come to a decision, having settled on
a small semi-agricultural robot. This one was similar in shape to
Artoo Detoo, save that its multiple subsidiary arms were tipped with
different functions. At an order it had stepped out of the line and
was wobbling along behind Owen and the temporarily subdued jawa.
Apparently the term "R2 Droid" can just be used interchangeably to describe any of that style of astromech made by Industrial Automaton.
Q. In New Hope, why does Luke call R5-D4 an R2 unit?
PH: The same reason we tend to call any cola Coke, any tissue Kleenex,
any adhesive bandage Band-aid, and any photocopy Xerox. When a product
is so successful that it becomes synonymous with its generic
description, people tend to use it as shorthand, so, while R5-D4 isn't
an R2 unit, the term "R2 Unit" is such a commonly used phrase for
Astromech Droid[s] that everyone knows what means, even if it's not
Pablo Hidalgo: Star Wars Insider #64.
As to whether this droid is better than R2, the answer is probably 'no'. Owen needs droids to repair his moisture vaporators rather than farming actual crops, so any of that style of model would probably suffice. On top of that, the usual rule about beggars and choosers would likely apply.
Interestingly, the film's junior novelisation does go one step further, referring to the droid as an "R2-5" droid. Presumably this is to explain the discrepancy.
The Jawa leader yapped a sharp command and the other Jawas scurried
out from behind the sandcrawler’s treads to dust off the R2-5. Then,
catching Owen’s eye, the Jawa leader made encouraging gestures at the
blue-domed R2 unit.