It's much worse, actually. Drove the car from Daejeon to Daegu today (about 100 miles) and discovered:
A) This thing has definitely pushed a head gasket.
B) There's a bearing going south somewhere. The ticking is getting louder and the oil pressure is getting lower.
C) Oil leaks from the valve cover front and back, from somewhere up against the transmission and from like six places on the oil pan.
I think the previous owner massively overheated it, warped every surface in the engine and then drove it around with the busted head gasket until water in the oil destroyed the bearings. Since I can get another one for 400 bucks I can't see the sense in a complete teardown and rebuild.
On a related note I stopped trying to preserve the engine late this afternoon. It'll now burn the tires all the way through first gear from a roll. Seems to run out of steam at about 5500 rpm though.
On another related note, I've officially given up trying to have the car ready to dyno for next week. I was going to do before and after tests for the custom intake manifolds my students are building, but there's no point if the car is blowing half its power out through the radiator cap. Guess we'll just build the parts and test them whenever I get a new engine. Since the time pressures are gone, I might hold out for the harder to find, identically priced 2.2L D-Tech.
On the final related note, I'm definitely pulling the pan on whatever goes in next. Me and my buddy the mechanic are going to do a very thorough inspection. The company I bought this engine from charged me extra to get a "grade A used engine," but if this piece of E36 M3 is grade A I had better learn my lesson about getting impatient and trusting people too easily.