tyre monkey

It's been a while since my last Scooby (forgive me father for I have sinned etc etc..)

Last one was a Spec B Legacy (had a Jap Forester STB before that!)

Anyway..

I am in the motor trade, and have been offered a 2001 Y Plate WRX Bug Eye Wagon.
It's a clean old thing, but has been driven through a flood last year, got water in, and hence I would imagine bent conrods, and or damaged block.

Now the car is very cheap, has some history, but is in the owners way and he is getting grief from Mrs Owner.. All he has said is the garage he took the car too said "New Engine mate.."

So my options are fairly flexible.. and assume I can get most parts (as I know an excellent scooby breaker), and the old engine is in the boot (so easy to work on)

Should I

1- Rebuild and repair the old unit. I would imagine bent rods leading to a scored or damaged cylinder(s) also likely.
2- Fit a standard WRX lump (as I assume this makes any ECU or loom or ancillary issues less problematic
3- Within reason upgrade to another unit (2.5 bottom end or an STI lump)

I would like to keep the spend under £1K ideally, know I can do option 2 well within that but unsure what other advice is..

Rest of the car is clean, with good bodywork, tyres, brakes etc..
Help appreciated..