Step 5 sounds awesome and I totally understand the desire to do it, but it will screen out a lot of top-tier candidates. A really good candidate is probably already employed. They probably don’t want to quit without another job lined up and they probably don’t want to work double hours for a week. If they’re job hunting then they likely have other offers you have to compete with, and are they going to chose the “maybe we’ll hire you if we like your work” over “sign here and you start in two weeks”?

Desperate people won’t be put off by this. If they’re desperate then they’ll have time to do your contract and the money will be attractive. They can keep job hunting in the meantime so there’s no downside.

That’s not to say this can’t produce someone good. I got my first full time programming job like this and I like to think I’m not completely useless.

And alas, I don’t have any answers for how to do it better....