... What I'm wondering now is whether or not anyone has ever actually done this before? I've never heard of anyone doing anything like that, but the world's a big place, and I can't be the only knucklehead that ever thought of it, right?
No, you're not.
We have 2 MRs here who actually discussed this very project, and since one was an architect, even designed the underground system to connect the layouts, extra signal circuits to monitor progress, including "access hatches", (Tee's every 2-3') for rescuing equipment. This was all going to go into 8-10" PVC sewer pipe to allow for double track, and all the wiring associated with a DC signal system. IIRC each monitored "block" was only going to be ~6' long and would light a red signal on a panel in each house. Also each car was going to have to have resistors mounted either in them or on the axles so if that car derailed the panel signals would stay lit, and not go out , indicating the location of the derailment.
Trouble is though, First, the houses are so far apart, ~80' that a train running at 60 SMPH, would have taken almost 20 minutes just to make the trip. Thats a long time to be out of sight. Second, the houses are at such a difference in height ~20ft, (could be more!), the grade would still have been about 4%. Three, one house's low side, faced the other's high side. The "low ended" house would need a trench dug almost 8' down for the pipe to enter at the layout's level, while the "high ended" house would have the pipe entering at about 4' above ground. Fourth; the resistors alone were going to be expensive as one guy has over 2000 cars and the other has about 1000. Needless to say, the project was abandoned.
Still its fun to think about.