Should She Sell or Hold?

Here's the story:

A friend of mine purchased her property— a three bedroom townhouse with a semi-finished basement—at the height of the last housing boom for $400,000 (USD). When the dust settled after the crash, her property was valued at $170,000. She has a mortgage payment of $2300. Room rentals in her area are between $600 -$800. My friend could finish her basement and add a fourth bedroom for less than $5000.

Do you follow me so far?

Recently, my friend came to me seeking advice. She wants to move from her area to a location with a better school district for her kids. She also did not pay her mortgage for several months which qualified her for a lower mortgage payment.

However, the problem is she feels trapped and unable to take control of her situation. She came to me wanting to walk away and asking for my opinion. Although I had an initial opinion, I tapped into the wisdom of the Bigger Pockets community and got a myriad of suggestions as you can .

I also spoke with one of my mentors who suggested that my friend complete the basement, rent her property, and move into an apartment while she rebuilds her credit. This would allow her to gain the positive revenue from rentals eventually (and avoid walking away from the property completely).

What do you think? Have you ever been in a similar situation? What did you do?