See if you can find out what exactly is wrong with the engine. Cause of lockup? Could be that the turbo's bearings are toast too, if the engine spun a bearing. Also, if a rod is through the side of the block, the engine just "might" not do anything for you. I can't tell you what I'd pay for the car, or advise you what to pay for it.
I'd pay nothing for it. It sounds like a basketcase car with a bad engine and body. The seller should just be happy if you took it off his hands for free instead of paying to have it hauled away. The only way I could see if being worth something is if you had a Mk3 and needed some interior bits.
i'm looking for a donor car as well with a rod knock or a bottom end problem because i have a free block that only has 80,000 miles....woo hoo, so ifi can find one thats not too bad i might take it up. I found an 88 turbo for 3,500 but thats wayy too much for a car i'm gonna kill....lol, i'd probably pay 550. 500 for the motor and 50 for the car...you could prolly par out the interior and drivetrain on ebay if you wanted and make some money that way.