should I walk away or stick around and make an offer

[Helen Kolton]

We are looking for our investment property. Our first rental.  I have been reading a lot and listening to the ipods.  Love them.  Josh encourge to ask questions no matter how crazy they are.  So please help.  Sorry its a bit long.

We went to see a house last night in New Jersey, Middlesex area.

At first when we walked around the house it seemed great, brick, roof is in good condition, central air, garage, beautiful nice size yard. As I was walking around the house I noticed cracks between the brick and the foundation in the ground. Gaps almost around the entire house. Then I noticed the gutters improperly routed directly into the ground above the basement, clearly the water is draining directly into the basement.

When we went down to the basement the smell of rut and wetness was overwhelming. The bottom of the basement door is all ruted, the walls and especially all corners are wet. There seemed to be a kitchen and the bathroom there as well. Lots of water and water stains on the floor by the hot water heater, and what used to be the kitchen. A little mold in some places of the basement as well. I think the entire basement needs rehabbing. It could be made into a small apartment with kitchen, bathroom, and living room.

The neighbor said that the houses on that street were build on the springs. The entire street has no drainage, so even the snow water has no where to go when it melts. I do not know how much this may cost. It seems to me that it is a huge expense.

Besides all this the house needs total updating, kitchen cabinets, counter tops, tile in the kitchen, appliances; both bathrooms, removing old wet carpets and varnish all floors; and paint the entire house.

Pros - house is in a nice residential area with good possible rents.  Might be good appreciation potential too.  

The house next door just got sold for 265 (asking 279K) same issues with drainage but the owners were very diligent in combating the problem and installing french drains around the entire house. The same neighbor told us that we will have to do the same. How much are we looking at, if we decide to install french drains around the house.

In any case they are asking 225, I am thinking of offering 125K. I would appreciate your input on reno and any general thoughts and advice on water problems.

Thank you all.