Clean install Snow Leopard

What the buyer is instructing you to do is incorrect and violates Apple's license.

To correctly sell or transfer ownership of a Mac, even to someone in your family, you should follow these instructions.

Disregard anything you are unable to accomplish. For example, Step 6 does not apply because your Mac shipped with discs. The buyer will need those discs. If you no longer have them, replacements can be obtained from Apple for a nominal fee.

Refer to What to do before selling or giving away your Mac

1. If you enabled FileVault, disable it in System Preferences > Security & Privacy.
2. "Deauthorize" your iTunes account. Same for Audible if you have one.
3. System Preferences > iCloud > de-select "Back to My Mac" and "Find my Mac".
4. Sign out of iCloud. Select "Delete from Mac" when it appears.

Next: Remove all your personal information by completely erasing the Mac's internal storage.

1. If your Mac shipped with a grey System Install DVD, start your Mac with that disc inserted in the optical drive while holding the c key to boot from it instead of its internal volume, which should be erased before selling it.
2. If your Mac did not ship with discs, boot OS X Internet Recovery:
   • using three fingers press and hold the following keys: ⌘(command), option, and R.
   • With a fourth finger press the power button to turn on the Mac.
   • Keep the other three fingers where they are until you see the "spinning globe" icon.
   • This method forces the Mac to download its originally installed OS from Apple's servers, which will not require an Apple ID to install.
3. Remove any Open Firmware password if you created one: select Firmware Password Utility from the Utilities menu and remove it.
4. Select Disk Utility from the Utilities menu.
5. Remove any partitions you may have created.
6. Select the Mac's hard disk icon, then select the "Erase" tab.
7. Select the "Security Options" button and erase the disk.
   • The more "securely" you erase the disk, the longer it will take.
   • The fastest method is sufficient since all but the most expensive techniques and equipment will be able to recover securely erased data.
8. When it finishes, quit Disk Utility.
9. Select Install Mac OS X from the Utilities menu.
   • An Apple ID will not be required. If a prompt for an Apple ID appears, return to Step 5.
   • Do not create any user accounts.
10. When it finishes, shut down the computer.
11. If you want to install the bundled apps that were included with your Mac, restart by using your Applications DVD if one was included, and install the bundled apps.

    Apps bundled with newer Macs that shipped without discs cannot be transferred. Its new owner must purchase them from the Mac App Store using his or her own Apple ID.

If the Mac is being sold to someone outside the family consider the following additional information:

1. System Install DVDs that came with your Mac should remain with it forever, and must be included with the sale.
2. Consider including your AppleCare certificate if you bought it, printed documentation, even the box if you still have it.

   AppleCare stays with the equipment and is transferable.

3. Execute a bill of sale showing the Mac's serial number.
4. Once no longer in your possession, remove the Mac from your devices in My Support Profile.

... I sell it as a "defect device" and I suppose the buyer is going to use components from it to repair other machines.

That makes perfect sense, but then why is he asking you do install Snow Leopard on it? If you were to do that and retain the original Snow Leopard installation media or a copy of it, it clearly violates Apple's end user license Agreement.

It's easy enough to comply with. Here is a typical Apple OS X license: https://store.apple.com/Catalog/US/Images/MacOSX.htm. It may be different for your jurisdiction, but Section 3 (Transfer) is essentially unchanged from the earliest Macintosh operating system in 1984 through today.

You don't need an operating system to sell Mac parts. I am not in position to decide upon its legality, but it seems unethical, at best, for the buyer to make that request. That's the reason I wrote what he's asking you to do is incorrect.

Edit to add: the retail Snow Leopard DVD you purchased is yours to keep, include with the sale, or sell separately. Installing SL on your Mac, selling it, and keeping that disc is prohibited by the license's Transfer paragraph. If the buyer wants to do that, it's his problem. Don't make it yours.