@M_Chavez saw your to do list, but if I was in your position I wouldn't jump the gun. And I certainly wouldn't mutilate the frame if I new 800% what I was doing so for a greater cause. Hope you don't take this the wrong way, hardly know you and your wrenching skills. So I'm starting from ground zero.
A while ago (
probably X years ago to be honest) there was a superb thread developing about the course of action when a frame lands like this in your lap. The conclusion with some very savvy wrenchers was to build up first at almost zero cost to see if the frame fit and frame is really promising for what your end goal is. It's like a weird check-point very early on to continue or not. So you don't bleed money; which you stated what could happen.
Obviously you need a parts bin with stuff you can trust. For this frame, you will need to get that head-set and BB sorted.
If it was mine, I would be going to the local tip and pulling SS kids bikes and BMXs out of the skip. I would then build this up SS to be able to just ride it with no frame modifications. Just to know if it really is worth pursuing and worth going the extra mile. The moment you butcher a frame the re-sell value goes down. I would slap on 26" if possible just to try it. You stated you can build wheels, so I think the time investment is prudent.
Don't worry about the vertical dropouts, there are plenty of hacks for magic gear and chain tension.