Learn Farsi: می‌گویند این اسطوره هر شب در ویلای خود موسیقی کلاسیک می‌ساخته است. - They say this legend used to compose classical music in his villa every night.

Because of the opening word می‌گویند (they say). The speaker didn't personally witness this happening; they are reporting a habitual past action based on hearsay. The structure می‌ + past participle (ساخته) + short copula (است) forms the Evidential Past Continuous, which is perfect for reporting what someone "used to do" according to others.

I thought ساختن meant "to build". Can it be used for music?

Yes! While ساختن literally means "to build" or "to make," Farsi uses it broadly for creating works of art. You use it for composing music (موسیقی ساختن) as well as making movies (فیلم ساختن). In fact, the word for a music composer is آهنگساز (tune-maker).

Could we use the possessive suffix instead of خود for "his villa"?

Absolutely. You could say ویلایش (his villa). However, using خود (self) is a very common way to show possession when the owner is the subject of the sentence (the legend). Saying در ویلای خود emphasizes that it was his own villa, which sounds slightly more elegant in this reported context.

Would people actually say می‌ساخته است in casual conversation?

In formal writing or news reporting, yes. But in everyday spoken Farsi, the است is almost always dropped. A native speaker would just say می‌ساخته, letting the context of می‌گویند make it clear that it is a reported past habitual action.