He located a non-corporeal being that had a strong feminine (as opposed to female) aspect, and convinced her to take on a corporeal form. I say "located" and "convinced", but I use the words uneasily; his main tools may have been luck and charm, but they might also have been raw power and brute force; there is no way of knowing, and the story can be, and has been, told in many ways. What is known for cetain is that Alfara became corporeal, and Alfar sired seven daughters upon her, and those daughters became the matriarchs of the seven elven clans. Alfar then proceeded to sire MANY children on each of those seven daughters, and those children bred with their cousins (and half-siblings) to produce the first true elves.
In time, there were rules; no elf was allowed to mate with a member of his own (his mother's) clan, or his father's clan, or his father's father's clan, or his mother's father's clan. This left three eligible clans for each elf; males were always fostered very young to one of the eligible clans, and were expected to chose mates from among the females with whom they lived. There were transgressions against this rule, but they mattered little, as all were the children of Alfar and Alfara; the rules mainly existed to make sure that the elves thought of themselves as one people, not several clans or sub-clans.
Over time, Alfara crafted four magical items: A ring, a crown, a scepter, and a throne. Using these tools in concert, she was able to enforce harmony on all of her descendants. Of course, this meant that they were able to organize and subjugate humanity, but Alfara did not care about that.