Here's a question: if the paladin cannot use Divine Sense in this situation, in what situation could she use Divine Sense? Only when it's already really obvious that a demon is present?
It seems like if you go to lengths to nullify Divine Sense here, there's not much point in having the ability at all.
Edit: I would have the villagers/townsfolk suspect something else, something that isn't detectable by Divine Sense. Maybe a group of suspicious travelers, or fey, or a tribe of nomads who have come to trade with the village. Maybe a gang of children from the wrong side of the tracks. If they suspect a demon, the paladin is going to use Divine Sense, and I think it's a bit unfair to nullify niche abilities on the rare occasions when they actually apply.