I'm in the same boat. I bought an 88 MKIII turbo just last night for $1,900 with 86,000 miles. On the way home I noticed the engine got hot. I know from past history it had overheated once and the thermostat, waterpump, and radiator had been replaced. I didn't think I was going to have a problem till I drove it today. The oil cap is nice and frothy, I smell coolant in the exhaust, and see blow-by coming out of #6 near the exhaust manifold.
I called on shop and they quoted me at $1,110. All gaskets, head rebuilt, and labor are all included in that price. I was wondering if there were another solution to this as I have pretty good mechanical knowledge, and if not too daunting a task, would like to try and tackle this myself.
If anybody knows where I might be able to get this done at a relatively cheaper price in San Diego please let me know. Ben.