The size of risk is inversely proportional to how thorough you screen.  

The median I got for the area was $483 p/sq ft which puts it at $355,488 based on the size which is 736 sq ft.

Hello Kyle,There are lots of things to consider, and there are lots of different types of Zoning for residential.For example you could be zoned residential, but the minimum lot size could be 1 acre, and you are buying 1 acre, in that case you wouldn't need a developer, you would just need a builder.For example, lets say you have 5 acres and a perfect rectangle property, that has an existing street that runs the long ways of the property so you won't have to put in any streets, you will simply need to get with a surveyor, figure out your minimum lot widths from zoning, and file with the municipality to get your property subdivided into lots.Once you have subdivided lots, you can either sell the lots outright to a builder, the cleanest transaction.Option 2, you could try to partner with a builder so you can split the profits, most builder's will want you to guarantee the loan, and still charge a build fee before profit splits.Option3, you can hire the builder, obtain the financing, and keep all the profits.Option 4, you could do any combination of 1,2, and 3. 

Below is a chart of what this simple structure could look like. 

An appraiser will use comps that are close to your location and in similar size and condition.

We did the majority of repairs ourselves (fam of 4), while we stayed there (3BR 1.5BA, 1100Sq-Ft) and learned alot about the place by using it on a daily basis (as a renter would).Ask yourself: What size beds fit best into the space so you can still move around (w/ luggage)?

In terms of your grandfather living there as long as he's not the owner having a dwelling fire/rental property insurance policy is appropriate.As @Greg Scott pointed out he should have a renters insurance policy whether or not he's actually paying rent.In terms of liability coverage, that depends on what you have to protect so there's no one-size fits all approach.

Most differences will be due to location, size, or rules/availability.

Market rents are $650 for a 1/1 and $1,200 for 3/2 in the area for this size house.   

If its near Jersey City or anywhere in Hudson and Bergen county, I have developers that buy site unseen 24/7 if in a good area, decent lot size and reasonable asking price.