Re 1 & 2:
It can be wherever you want. On any server.
>> "3. Do I have to update the original selling apps on the Wordpress media location or can the customer download the first version and directly update to the latest?"
Whichever you prefer.
Updater Through Wordpress
My customers purchase my app through a Wordpress front end. I do not access the ftp site directly as it would throw off the DB, the product IDs, keys and Merchant Services. 1. Can I place the Update folder on a sub-folder within the FTP or does it have to be at the same location the original app is stored?2. Can I place the Update folder on another server?3. Do I have to update the original selling apps on the Wordpress media location or can the customer download the first version and directly update to the latest?