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Most of the times the heater core gets clogged or corroded. inside the fire wall and the hoses run through the engine compartment and into the firewall. You can try disconnecting the top and bottom hoses and using a garden hose to flush out debris. Flush through top hole first then bottom cycle back and forth to break everything up and water comes out clear. Then hook the hoses back up. Also make sure that your radiator l with coolant at the proper level. The heat typically coming out warm then blowing cold is low coolant or clogged heater core but the gauge on the dash should only symbolize engine temp. If it stays on cold, you may also want to check your thermostat to ensure it functions and opens and closes as it should. All cheap fixes that can be done yourself.
Without knowing what is wrong. Have the guy pay to fix it. that way, no matter what it costs, its not your problem. $3000 is way to much for that old car, find something better.
it can possibly be a broken gasket seal in your water pump, i recommend that if this is the problem replacing the timing belt and water pump at the same time. i have a 1987 toyota camry station wagon as well and the same thing happen to me, if its leaking from teh side, its most likely the waterpump which is located underneath the alternator and attatched behind the timing belt
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