,
Your steps all look correct except for "Unextend the Network using HCX" in both your scenarios. I am not sure what you mean by "Disconnect VM1 logical switch from DLR"? I am also assuming your are using NSX-T DFW?
I am still not sure if your VCF3.x and VCF4.x environments are in the same network domain or if they are in separate network domains. Are you expecting to move the VMs from NSX Souce to NSX-T/Overlay on the destination side or are you going to move the VMs from physical source to the physical network on the destination side? HCX network extension is for allowing VMs to be migrated to different networking environment without changing the VMs network config (i.e. IPs, DNS, firewall, NAS, etc.). HCX network extension just "hairpins" the network traffic back to the source environment. It is essentially a VPN.
You have to do one of two things before you can unextend the network. Expectation is VCF3.x is a separate Source network 'domain' & VCF4.x is separate destination network 'domain')
1. You would need to reIP the VMs to use a new IP from a subnet on the destination side (physical or NSX-T Overlay), then you can remove the network extension.
OR
2. You will have to migrate ALL VMs sitting on the source side subnet to the destination side, then swing the source side Subnet to the destination side (Datacenter. External Cloud, NSX-T, etc). You can then remove the network extension.
NOTE: This step is a bit more involved based on where the subnet is being swung over to.
If VCF3.x and VCF4.x environments are sitting in the same network domain and will NOT be using the NSX-T overlay then there is no reason to use HCX network extension services, because you can just make use of 802.1q VLAN trunking to make sure both environments can see the same subnet. You can then use HCX to migrate the VMs between the environments and your VMs will not lose network connectivity.