You can compile LFS anywhere. I've built an LFS by mounting a flash drive on /mnt/lfs.
When you install grub you should just be able to execute grub-install /dev/sdb (instead of /dev/sda) and then write your config file and such. This will put the boot files in /boot/grub so make sure you've set up your partitions the way you want (i.e. if you want a separate /boot partition that you've set it up and mounted it) and that you run this from within the chroot environment so that the proper /boot will be used.
When you write your config file, write it as if your VHD is /dev/sda, since that's what the device will be called when you boot the VHD somewhere else. (i.e. if your root partition is, say, /dev/sdb2 right now, then use /dev/sda2 in your config file.)
Last edited by fmillion; 09-29-2012 at 10:19 PM.