1. Nothing wrong with going fretless.
2. I don't know about that one, how good are you as a machinist?
3. OK, how are you planning on applying a natural stain onto a painted body? Stains are design to be applied onto bare wood. Do you mean paint? You could remove the paint with either chemicals or a heat gun, then lightly sand and stain. But it all depends on your abilities.
For $10, use is as a learning tool, work with it, see how the binding is attached and how it sands, use the electronics and harware for a future project. Just have fun with it, try to remove the paint and see what you end up with. If you mess it up, you only lost $10.