Two options... refinance and pull out the cash due to the explosive land value to finance your addition.Other option... sell... move into a new home and potentially not have a mortgage.Not having a mortgage... and going debt free could drastically change your family's life for the better, or having cash and successfully investing in other real estate... again could drastically change your life for the better.Good problems to have.

Buy and hold for the sole purpose of appreciation is a very dangerous game. 

If so, you are in very dangerous territory and should definitely STOP all your dealings with this transaction until you consult an attorney and the CA foreclosure consultant laws which specifically prohibits taking advantage of homeowners in foreclosure (in default) against predatory investors. 

And this is not the case for a true flip, as in Basit's #1.Mentioning #2 creates a dangerous incentive to ignore the rules applicable to flipping and rely on a flimsy declaration of "intent" to hold the property as a rental. 

I think proformas are a dangerous thing.

@Brett Wagner best MF are the ones that rents are low, mostly occupied and the property is in bed shape and not in a dangerous neighborhood.You can increase the value by making the repairs needed (reposition)-> by that increase rents and ROI -> and by that resell it for a big payday.The most important thing is TO DO THOSE REPAIRS, the more time you delay them the more they get more expensive.

Well, I've been living in this house for quite a year now, and the Landlord is always being disrespectful with us and always taking too much to fix things in this 10 years old house that is falling in peaces , last week our a.c broke, it wasn't getting cold, so we asked him and only 4 days later someone came to "help", and the a.c. was working again for 2 days, and then it got it broke (the air made an explosion sound and there was smoke coming out of my son's bedroom air ventilation) so we turned the a.c. off and open the windows so the burning smell would go away and then we called the Landlord and told him about what happened and that we need it him to call  someone to fix it or something, anything.

Part of me says "Josh this is a very dangerous neighborhood, and you know it."

Here is the thing, in large cities like here in Los Angeles, buying at the courthouse steps is fraught with danger and it is very hard for the "small guy" to get in there and get a good deal amoungst the big boys who have been there for generations.

We weren't sure if we should submit such a low-ball offer.All we care about is getting out from under the mortgage and moving on, ideally with no danger of being sued for the deficiency.