I realized I didn't specifically answer some of your questions...
1. Do I need to layer them or mix them? like soil + perlite etc.
Nope, just potting soil and pebbles.
2. How does one sterlize soil?
You shouldn't have to if you get just plain black potting soil.
3. Do I just plant and drop the planted pots into the tank or should I sit them in water for a period of time before putting them in the tank?
Lower them in slowly, realizing you may have a small mess to clean up (but it isn't harmful).
4. Do I still need to add fert sticks to the pot?
If you have aquarium fert sticks, this wouldn't hurt, but I'd avoid anything urea-based just in case your cichlids DO end up digging them up and give you an ammonia spike. Potting soil is VERY rich though, my guess is that you won't need them.
5. Any suggestions for the size of pots? swords can have massive root system, do I need like an one gal pot?
I said this before, but 4" or 6" terra-cotta pots would work nicely.
6. I probably need to seal the drain holes right?
I wouldn't, just so when you lower the pot in, it can fill up as it lowers instead of all the water rushing over the lip of the top when you finally get it down low enough and possibly making an even bigger mess