The only time you the forum owner deals with payments is payments for listings or upgrades.
Payments between buyer and seller are between them if they want to pay by paypal,pay on pickup, pay though sites like escrow it is up to them.
The only part that the classifieds system deals with money is payments for listings/auctions themselves.
And how can I make sure that they are a legitimate seller or not so that unsuspecting patrons don't get ripped off?
Not much you can do for that. Buyer beware mainly. The buyer can check the sellers rating history/post history etc ask other people on the forum about their experience. If the buyer didn't get anything they can always contact their credit card company or paypal and dispute the payment.
Do I have to pay to upgrade and how much is it, even though I pay for the Classifieds mod initially and is it required to upgrade or will the Classifieds mod work regardless?
The classifieds script is a one time fee which includes a year from date updates that are posted. After that there is a renewal fee that can be paid at anytime to bring your classifieds version to the latest.