Hi WebFeat,
You've taken on 2 tough things here - a spammed record and a business owner who may not want to do things correctly. Hopefully, you will be able to help him see the light on this. Let me copy some of your remarks and respond to them individually, please, so that I'm sure I'm covering what you want to know.
Before hiring my company he had like 30 domains (keyword based) and had tons and tons of fake google places listings. He actually got a lot of traffic that way.
Bad, bad, bad. Yes...you can game the system, but this is the type of account that eventually gets banned and getting back into Google's good graces after that can be something even the best Local SEO on earth will be unable to accomplish. The client is in an emergency situation right now. If you can get the record cleaned up before punishment occurs, you're saving his neck.
However I will not tolerate that kind of stuff and want to do things the right way.
Thumbs up for you and 'boo' to the previous company who taught the client to engage in these practices.
In the end he will have 8 sites and wants to expand into other services and regions.
Some business owners do take this approach of having a separate site for each of their cities or services. The main argument for such a practice is that a) the exact match domain name can give a ranking boost and b) links coming into the domain will have matching primary keywords because of the URL. One can choose to do this, but I don't consider it a best practice for several reasons.
The first is that it hints at a single entity being multiple entities, which is not really true. The second is that it makes management (SEO, marketing, webmastering) incredibly complicated. The third is that I believe it is better to build the authority of a single domain with tons of great content and links than to spread this thin like a scrape of butter over a whole loaf of bread. Of these three statements, the last is really just my opinion on this as a Local SEO. It's not proven fact or anything like that, but like you, I just think it's not a best practice. I would advise my own client that if they've got a single legal business, that = a single really authoritative website they can develop.
To me the best way to do this is a generic domain with a locations page and a page for each city.
I'm not quite sure what you mean by a generic domain, but at any rate, I agree with you about a single domain with a landing page for each city and each service. Then, I would build beyond this on the website, perhaps with blogging, covering every service he offers in each city one at a time. This is somewhat akin to the process your client thinks is best - having a different domain for each city and each service in each city, but instead of doing this on a ton of different domains, it's all under one roof, under the name of his business, on a single, powerhouse website.
The for the Places he would get one account - an address that is hidden since he goes to customer locations, and just multiple city defined regions.
He does have an office like address at each city. So should I make him a Places listing for each city or just the one? And of course how should the actual sites be organized?
If the client has a REAL location (and you should be sure of this because what he's told you are locations could turn out just to be virtual offices) in each of his main cities, then yes, he is allowed to have a Place Page for each of his cities. If he has only one legit location, then he should have only one Place Page.
That's good that you're hip to the recent 'hide address' guideline changes. This is still early days with this. My interpretation of the new guideline, at this point, is this:
Type A
Your business is brick-and-mortar and serves all customers at its location. Show your address.
Type B
Your business is home-based and serves some customers at your home and some on the road. Show your address and use the Service Radius tool.
Type C
Your business is home-based and does not serve any customers at your home. Hide your address.
*see http://www.seomoz.org/blog/why-you-may-need-to-hide-your-google-places-address-asap
You'll need to figure which one of those fits your client's business model. I would also recommend that you read this post on this subject by Mike Blumenthal which points out some of the vagueness of the guidelines that have yet to be adequately resolved by Google:
http://blumenthals.com/blog/2012/03/24/is-googles-new-requirement-to-hide-a-home-business-appropriate/
Google has really done a poor job with clarity on the new guideline. Hopefully, you can figure out the right move for your client on this and he will abide by your advice.
So, bottom line on this is that my professional preference would be for a single domain and whatever number of place pages matches the legitimate offices of the client. I would focus on building out content rather than building out domains.
That being said...if the client has built an empire of domains that are getting him business, it may be necessary to maintain those, but whatever he decides on that, he should be informed that by spamming Google Places he is risking his total visibility in Google. Additionally, if he ends up with just 1-2 Place Pages and 20 domains, it's going to be complicated deciding which URL the legit Place Page/Pages can point to. Again, another reason to put everything in one basket. If he wants to keep the domains, you can go with that, though it's not ideal, but insist on him cleaning up his act in Google Places or tell him you can't work with him as he's heading for a train wreck, sooner or later.
Hope this helps!
Miriam