After discovering what seems to be Sabin's house, you should go to the mountains to look for Sabin.
Go to the Mountains
Leave Sabin's house, then go east until you find a cave. Go inside.
From the cave entrance, go north to enter the cave itself. Follow the straightforward path through the small cave, then when you are outside again, go to the right and go into the cave entrance there.
From where you enter, you can see a large rock below you. Go below and to the right of it to find a chest that contains Guardian. This is a weapon that Locke can equip.
Go back into the cave, then go north. Don't go up the bridge; instead, go east through the wall to find a chest. It contains an Atlas Armlet/Gigas Glove, which you can equip on characters using the Relic option in the menu.
Go back the way you came until you reach the bridge that goes north. Cross it and go outside, and follow the shadow. When you reach a cave entrance, go into it to find a chest. Then go back through the cave until you are outside again, and go left to find another cave entrance. Go in.
Cross the first bridge, then use the bridge above you. Follow the path until you reach a save point. At the save point, use a tent, and save the game. Go through the cave door on the right, then follow the straightforward path until you reach Vargas.
Kill the Ipoohs first, then attack Vargas. Terra or Locke should do any healing that is necessary. Edgar should use AutoCrossbow, and Terra should use Fire. Eventually Sabin will intervene. Have Sabin use the Pummel/Clobber Blitz against Vargas (choose Blitz, then press left right left on the control pad, then choose Blitz again).
Sabin also has the AuraBolt/Aura Cannon Blitz now. You can see his Blitzes in his Skills menu. For a list of all the Blitzes that Sabin can learn, visit the List of Sabin's Blitzes.
Leave Mt. Kolts
Enter the cave that Vargas was blocking. Open the chest, then go east and go down the stairs. Continue going south until you reach the overworld. Your next stop is the Returners' Hideout.