That sounds like a good car, but you can't really tell without pictures. There's a e30 on the board with over 300k, Just make sure you check your oil pan for bolts!
1) On replacing the motor, if you want an m20 it's not really worth it to put in a 318, the only thing I would do would be an S/M 50 (not that I am). But for the cost you could get a Metric Mechanic M42 or Dowining Atlanta S/C for the same if not cheaper. On the M/S 50 swaps, there's C/D's or books that you can use.
2) If it has a zipper around the window you can replace it easily, but if not you have to replace the whole top.
3) Cloth is fine, It's not hard to find seats as long as they're E30 seats I think the fronts are all interchangable. Also the convertible only has 4 seats (the rear only has 2) so you'll have to find a Cabrio specific seat. Also the stiching in horizontal and on a regular E30 its vertical, but if that doesn't bother you then regular front seats will work. The best be would be to just get them reupholstered. I'd say buy it, you'll love it!
Preston