Some do desktop underwriting, which is akin to the Zillow estimate, because no one comes to view the house and the value is from recent sales and Price for the square footage. 

Fine at the higher end, when it's comparable to other units, better make sure the rooms are square as the eye picks up the imperfections much quicker running an angle to an intersecting plane, especially in in an empty room. :)

The fact that he apparently wasn't going to rent one to her and her boyfriend, neither of whom could document their income, was a big red flag.

I painted the door & trim around the front windows a nice, rich red (because I couldn't find cheap shutters that were big enough!)

Pick a criteria for ex. like 3bd 2bth 1500 sqft then look at similar houses in the same neighborhood or least within a half a mile with same amount of beds and baths and couple hundred feet within the square footage.

Are you including all your building permits and fees in with the cost per square foot?

Will the refinancing of the appreciated value of your rental cause your debt service costs to increase and put you in the red?

Lot of red tape but about as cheap as money can get in this scenario. 

That is a red flag.

Due to the size and zoning, it seems a win/win.The house has lots of issues and is just 1600 square feet, and the potential for income is of course better by improving the site.I'm hoping to tap into knowledge on this site.