Need some opinion on this engine. Am I screwed?

[white46]

Hi,

Some of you already know I've bought 03 4.6is pretty cheap.
More info on, http://www.xoutpost.com/bmw-sav-foru...-03-4-6is.html

Anyhow, I've purchased new motor, me and my friend replaced guides, rebuilt vanos, PCV valves, etc... anything that is PITA to do after the engine goes in.
It's taken pretty long time because we both have family with young babies and full time job. So much we can work on each day.

So we are at final stage, torquing down the crank shaft bolt.
When we were tighting it up, crank spinned, and all of sudden water gushed out from exhaust port. #3 cylinder exact.

I'll let pics and videos to do talking.

https://youtu.be/xThqS5Bu4vs

https://youtu.be/TWum8nJHqPY

I tried to contact seller but the engine only has 30 day warranty. so pretty much no help financially.
Having said that, he said crank the engine without spark plug and drip some engine oil, it should clean itself up and all water should come out. Also told me that sand like particles in water is from carbon build ups. Nothing to worry about. Is this trustworthy?

I never seen anything like this.... I see some rust on the valves.... Not sure whether there could be some corrosion on piston and cylinder bore.

What you guys think? Is this engine garbage?