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The B230FT turbo engine is famous for knocking noises. It's called piston slap, and they all have a tendency to do it. The turbo engines have lower compression, achieved by using shorter pistons. These pistons have very short skirts, which allows them to rock slightly in the cylinder bores. This happens basically at the top of every piston stroke, and makes an audible TOCK sound.
It gets worse (significantly worse!) in engines that have been overheated but that isn't a prerequisite for it to occur. This guy may be honest about it or not- if he ever blew a head gasket and/or overheated the thing, that's probably the root cause.
The good news is, it's not harmful. At least not from what I've seen. Usually it's worse right after a cold startup, then quiets as the engine warms up. Revved at low speeds (2500rpm), it becomes quite noticeable. Most engines seem to be able to live like this for 100K or more after it becomes audible. SOme freshly rebuilt engines even do it, sometimes even after sleeving the cylinders and re-boring.
I would pay to have it inspected by a Volvo mechanic and get a list of what he finds wrong with it, and evaluate that. See what certain repairs cost and see if you still want the car after that inspection. If he considers the noises normal and everything else checks out, it should be a fine car. Or at least no worse than any other old 740.
The FAQ here will be your best friend! Especially read the section on "Buying a 700".
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Rob Bareiss, New London CT ::: '86 244DL- 215K, 87 244DL- 230K, 88 744GLE- 198K, 91 244 180K
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