During my shot at it, I did make many a mistake, but only had to go back and recompile the packages I made a mistake on. And the idea of LFS is to use a distro (such as their live disk) to compile all the packages into a temporary tool kit, then chroot into the new environment, then compile (and, in many cases, recompile) everything into their final location. As long as you keep the compiled source, you can always uninstall it, reconfigure it, then reinstall it to fix any problems with that particular install.
So, to answer your question, you compile the binaries both before AND after chrooting into the new environment, and you do use another distro to compile the source into binaries from the host distro, but making the newly compiled ones supersede those of the host.
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