If you pay him to build you that computer, don't trade in your old one, there's no point. I can't imagine any good coming from it, the parts in it are damn near worthless now, it's not going to benefit him (and it shouldn't affect the price). Keep it as a backup, or atleast use the harddrive.
As for the deal itself, 700$ is a little high, but the computer you are getting isn't too bad. He is ofcourse making a profit, but as you mentioned the convenience is what's important to you. No Windows license is a no no, but it's not like Microsoft is going to come get you, it does show poor (and illegal) business practice however (assuming this guy is doing this on a professional level).