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Bought DRZ for $200 but it's fried

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I bought a 1995 DR 125 from a guy in Grand Prairie Tx recently. It was in ok shape but didn't run so the guy said he would guarantee the engine was in good shape, just needs carb cleaned etc. So I bought it. The guy even signed the bill of sale saying he guaranteed the engine. So I drained the oil, its grey, water in the oil. Changed it several times. Got it running. Changed oil/filer again. Got it ready for inspection but when I rode it grey smoke billowed out the exhaust. Took top end off and the rockers have visible "dimples" worn into them and are burnt (blackened). Piston has tons of excess clearance, wrist pin has wear marks you can feel with your fingernail. Exhaust valve guide is broken off where it enters the head. Cam looks burnt and lots of gouges/wear. Head has metal transfer in cam channels where some steal is imbedded into aluminum. The guy I bought it from won't return my calls (big surprise). Question is, is the head salvageable? Can I press the guide out and replace? Is wear on cam channels ok or repairable or can I get another head cheap? I think the lower end is ok and would like to make the engine into a project, high hp (for a DR anyway) motor. Any advise for stroker, big bore, 200cc engine replacement or anything else that I could do to build a fun bike without investing a ton O money would be appreciated.


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