Again, if your $250k is true, and includes all the electrical upgrades, new plumbing runs, potentially new foundation pour (since I assume the existing garage slab is not capable of supporting a new two story house), I am guessing since I don't know the market, but assume you will have a lot of equity by completing the project.

To hit on a few points from your post - You can withdraw contributions from your Roth, and yes you can withdraw gains after 5 years.

I don't think that happens without one two things; a harsh hit in the economy or a light hit in the economy + 10 year screaming.

That’s why you’re not seeing these properties listed as tax liens you can buy.But you’ve still got a few angles to work with:Check with the county tax office – Some properties slip through the cracks and don’t hit the auction list right away.

We haven't lived in the townhouse in the last 2/5 years so we would get hit with full capital gains.

It's a competitive market and most of the people that get in trouble here are ones that buy blindly without actually figuring out the numbers, etc.You'd be surprised the number of times I get asked after month one if their electric bill of $xxx or whatever is normal, and the thought running through my head is "how did you not  check things like that before you committed half a million dollars to something?"

Maybe a fresh coat of paint, flooring, unless what's there now if salvageable, make sure your electrical and plumbing  are in good working order.

But if you really wanted to, you could substantially overfund your collateral in case of a quick drop in price or wait until you're sure we've hit bottom. 

Others have hit the nail on the head.

It sucks but is the best way that I know to hit the fast forward button on your investing journey - especially in the current market.