Water-in-oil
Best case: Failed PCV system.
Coolant-in-oil:
Best Case: Intake gasket failure.
Worst Case: Cracked block.
Better find out FOR SURE if they mean "coolant in the oil".
I wouldn't pay $800 for a two wheel drive '89 with a potentially popped engine. I might pay $800 for a 4WD '89 with a popped engine, but only if the rest of the truck were pretty superb.
I would buy a truck with a bad engine for that price, Especially if it had a title. A bed in my neck of the woods goes for 5-6 hundred, a complete front clip from $400 and up, a hood is 50 bucks and a complete cab with a title is worth the $800 (IMHO). Plus there is the rest of the chassis and drive train.
Body work(rust repair) ends up costing more than driveline work most of the time due to the fact that it is never done 100% correctly, that is you can even find a shop that will do the work to begin with.
I just found a C1500 in Tennessee with a 4.3 with a severe rod knock for $700 (plus) $300 to run from Erie, PA to Blountville Tn. and back. The cab will go on my '90 K1500 and I can part the rest of it out and get back more than 50% of my total cost. I guess that it all depends on your location and your needs,