OK, I have to partially agree with TheKid here. Buying a car that has had a great deal of modding or a powertrain swap could be asking for trouble. They may not have done the job right, could have cut corners, or the parts they swapped in may not have been in good condition. Do you know the people who did the work? Do you know the person who owns the car now? If you have problems, will either of them help you out? By the way, that would be something to get in writing, if possible, but they would also be insane to agree to that. In any case, you could be buying a never-ending project.
...On the other hand, if the parts were in great shape, or rebuilt pryor to installation, you could be getting a great deal, as you would basically have an M3. I know some purests here will disagree, but if you put the tranny, engine, driveshaft, diff., suspension, steering rack, and all other associated parts, into any properly repaired/prepared E36, what you get is pretty much an M3. Sometimes (in the case of the famous M3-powertrain-into-a-318ti swap) you end up with a product better than an M3. Also, for $7400, that's not bad. The big questions I would have are:
-How many miles are on everything?
-Did they rebuild the engine and tranny, or at least change all the seals and do a thorough inspection?
-Has the suspension been swapped out for the complete suspension from an M3?
-Has the steering rack been swapped? The steering ratio on an M3 is quicker than any other E36.
-How many miles have been put on it since they did the work?
-How old is the car that recieved everything, and how many miles are on it?
-Do they have reciepts for any rebuilds or rebuilt parts that they bought?
All this information is pretty important if you want to make a good, informed decision about this car. I had a '95 318i, that is now a '95 E36 4 door with no engine, tranny, or driveshaft. It is sitting at my local Auto Hobby Shop (Great benefit of being military) waiting to be cleaned up and prepped for receipt of the M3 powertrain, suspension, and other misc. stuff I just pulled out of a '95 M3 yesterday. The 318i was great to drive, and handled excellently, but due to a bit of poor maintenance (not by me), the head gasket blew and my motor went bye bye. I had already bought the M3 in hopes of rebuilding it (wrecked lightly), but now I have a frankenbimmer project.
As far as buying a Bimmer for yourself, you need to really consider what you want and are willing to pay for and deal with in the long run. The 318 gets pretty decent gas mileage and can be pretty peppy. But it lacks in power compared to any of the six cylinder models, unless you supercharge it. (Downing Atlanta, around $4000 gets you about 180 wheel HP) For autocross or SCCA, it's great. Has almost perfect 50/50 weight distribution and handles wonderfully. However, it will get wiped all over the pavement by a 944 turbo. Plus, there really aren't a lot of mods available for the 318 engine. The 325 or 328 will get you more power to start with, but will also be more expensive to maintain and fill up at the pump. However, there are plenty of parts and upgrades available for the 6 cylinder Bimmers. Insurance will also be higher, and handling isn't quite as good as the 318, but the power is greater. Top speed is higher in these also, partially as a result of the differential used. The 318 has a 4.4 to 1 diff, (I think, 4.-something at least on the autos) making it great for acceleration, but somewhat limiting is top speed. Then again, if you want to make a really really quick M3, drop in an auto 318 diff and see how fast you can span 1320 feet (1/4 mile). Rear diff ratios for the 6's are in the 3's. And the M3, well... It's awesome, and has a bit more power and better handling than the other 6 cylinder models, but fuel mileage will suffer even more, and generaly speaking, almost any part on the car is at least 10% more expensive than a non-M part. So, if you want cheap transportation and plan on driving long distances, but don't really care too much about being really fast, get the 318. If you want a little more power and about 10 times as many tuning options, but don't mind the higher maintenance costs, get the 325 or 328. If you have a toilet in your house made of fresh stacks of twenty dollar bills and use benjamins to light your cigars, get the M3. Really though, if you can afford to spend the extra, and want a bit more power and better handling, step up to the M car. Either way, don't be afraid to ask any questions, and keep us informed about what you do. Always great to hear about another happy BMW driver.