Rehabbing Houses - breaking the rules

We purchased a house in February through a short sale and have spent 95% of my spare time renovating it since. Like most of the houses in foreclosure I look at, it was a wreck and full of stuff, so lots of things were hidden (and there was 2 feet of snow on the roof). I also just flat out missed some things (like an old hot water boiler). So after the the owners moved out and we started renovating we have discovered lots of additional items that need to be replaced - roof, boiler, windows, bedroom doors & frames. We also decided we needed to cover the ugly tub colors.

My original estimate for repairs was $5k for flooring and paint. Now it looks like we will spend about $12k. Fortunately, due the fact that we decided to do nearly all the work ourselves and the cost savings tips we got from Pete Youngs about contractor discounts we probably saved about $10k over what we would have spent for all the additional work.

The additional spending has really thrown off my economics based on a selling price of $185k I had estimated. Guessing at what the house could sell for has been a real challenge. There have been only 3 sales in the past 2 years within the neighborhood. One was the exact same size and style house which sold for $175k, another was a house with 900 sq ft more area that sold for $210k. The previous owners of our house had purchased it a year and a half ago for $182k. Similar houses 1/2 mile to the north in Amherst sell for $300k, while houses 1 mile to the west in Buffalo sell for $12k. Our house is located in a really nice neighborhood identical to the Amherst area, but a rotten Buffalo zip code (even though it is physically in Cheektowaga).

The "rules" of rehabbing indicate that you should not try to have the most expensive house in the neighborhood, and that you should buy a lousy house in a nice neighborhood. Well, we will have the nicest house in the neighborhood, in a bad zip code and need to sell it near the highest price ever sold. This will mean additional risk since our monthly payment of $1780 will eat up profits pretty quickly.

This looked like a great deal when we bought it, but could turn into a bad decision. We are hoping that someone will see a "move-in condition house that will make them willing to buy in this area. The house is nearly 2800 sq ft Colonial built in 1955 and would be a bargain at $200k anywhere else in the country (except for the $8000 annual tax bill!). Were it not for the school district we would move in ourselves.