I'm in!!
Since my entire CD will be done this way... I think its a great idea... at first it can be intimidating but once you get the right setup it goes good.
I do have to say, it will cost a couple hundred in some cases to get the basic equipment needed to get a GOOD recording at home. The cost will vary depending on what you play... but it can really be done online..
Here is a starter kit:
multitrack software
Audacity = Free
monkey's Audio
.wav compression tool (smallest w/out loss)
Goldwave
/wav/sound editing tool
Optional
Direct box or 2 channel audio interface
(must record dry raw audio, no effects)
If you’re a vocalist... buy a mic.. a GOOD mic, it will make a world of difference!
For guitarists and vocalists the #1 challenge is how to get that raw vocal track onto the PC and have effects to listen too at the same time. You just can't give a decent performance w/out hearing a processed signal, it sucks... it will pull the inspiration right out of you...

So... you must split your signal so the PC records dry while you listen wet... Or purchase an external recording interface that has that feature.
Drummers... well, there is no inexpensive solution for acoustic drums... it requires the same good mics as a regular studio... so that’s a bummer for you guys....

The E-Drummers have it easy, but the sound.. well, it works for some people and is certainly better than a machine.
If you can get some good raw tracks from everyone you can produce a good mix with your PC and some vst plugins... the good ones are not free but you can get a pretty good arsenal of decent stuff for free. Once everything is good and you want a polished project, you can hire an engineer with a studio to do your final mastering.
I am glad someone else is suggesting this... of course that is what I am doing here... looking for a singer and a bass player for my "virtual band" and CD project.
So... I say good for you and go for it.... I really want my stuff recorded so I can get it out to thousands of peeps... I love gigging... but the small local clubs are not going to help me if the stuff isn't on a CD... big fish in a small pond and the songs get lost forever..
I want to be a small fish in the big pond!!
ok, ok.... we have already established I have issues!
X!