I've never heard of a state not issuing titles for under-600cc bikes, either.
Maybe the guy either ain't sure about how it works or suddenly forgot how it works.
If it turns out I'm wrong, somebody let me know because that'll be a new one on me. :)
In every case I sold a bike with a lein on it (I owed money on it), I had to take the buyer's money, send it in and pay the load off, then I'd get the title in the mail a few weeks later.
Just remember:
No loan paid-off = no title.
Doing this requires trust in the guy selling the bike.
If you don't have a warm and fuzzy feeling, I'd pass and look for easier pickings. :)