In General-
Well most people like to use assorted terran buildings to make towns, but I think that looks sloppy unless they have some kind of formation to them (just randomly placed buildings is ez to make). This is good if you want the buildings to actually do something, though.
Terrain buildings, while less common, may look a small amount better, but don't have any functionality like units, and are pretty much static. Using extended terrain and doodad tiles and sprites can make some good effects, though.
The best bet however would be to combine both. Unit limits might need some consideration, so terrain buildings would be a good option to minimize unit usage, while at the same time, to overcome terrain limits, you can mix units with terrain bits to add functionality or effect. You can also use triggers to make effects with buildings, but beware the location usage involved in doing so.
Tileset Specifically-
As for doing buildings on tilesets, here's a breakdown:
Jungle can use its many temply bits and bobs to make some nice old-style buildings, which can be retrofitted with badlands/installation/etc sprites to look quasi-modern-ish. Jungle lacks any real tech/modern stuff of it's own, though.
Badlands can accomplish a good modern town/city or post-apocalyptic feeling, but without a lot of terrain butchery or sprite pollution it's difficult to get much more than that. You can do a limited amount of jungle-style buildings by remixing certain temply doodads, though.
Desert also has some good terrain options for buildings (including those adorable little shacks), but the theme of the map kinda limits what kinds of towns you can make.
Ashworld? Don't make me laugh.
Twilight CAN allow some decent buildings with creativity, as seen in a few RPGs, but again, it's theme limits it a bit. Sprites and units of course can help with that.
Space is almost exclusively mechanical, which would be perfect for a city of the future or if the entire map was man-made styled, but you'd be hard pressed to do much more with that theme.
Ice tileset has good town options, as it comes with a structure terrain brush and some doodads options for mechanical stuff. While the theme limits it somewhat, you can do at least some things within the theme (such as docks, ghost towns, small cities, a quiet mountain town, etc.)
Now that I think of it, what we need is to brainstorm some more samples of town buildings in different tilesets. I know with all this extended stuff we've been doing there could be some interesting effects that might be good for general maps.
Jungle tileset, while common is what i was looking for, since its the most... "life-like" tileset there is (old style). I like the idea of lethal's (river/waterfall), while tuxedo has a interesting concept, instead of using terran buildings i was thinking of using the desert sprites as buildings (the shack like buildings). Waterfalls would be a nice addition to a valley town. The lake idea would add a interesting theme to it. I'm gonna start to work on it.
Hmm... I think i should add something. Dunno what.
(wondering what to do with buildings)
Suggestions are still apprectiated, as well as additions. In order for me to get better at doing terrain, i would like some (suggetsions/additions).
NOTE: This is my VERY first time using rectangular tiles for making ISOM terrain.
When you say 2nd town.. do you mean ugh
it looks the same

EDIT : -between houses, you need stuff other than just dirt..
-and part where you try blending high dirt --> bridge, blocky
-waterfall part is UBER blocky