Starting with the basics, I suggest that you actually own a West Indies 36 (which was built by Heritage). That is quite a different boat than the Heritage 35.
While the general interior layout is similar to the Heritage 35, the engine access to remove and reinstall the engine would be considerably more difficult. It would probably require largely disassembling the engine through the sail locker to get the weight down and dimensions smaller.
But before I did anything drastic, I would close the seacocks and open the compression releases, then hand turn the flywheel to see whether the engine really is seized, or "seized" was simply the term the prior owner used because they didn't know better.
I believe that there is a removable plywood panel in the sail locker that provides access to the flywheel. There may also be an access panel in the quarter berth.
If you are able to rotate the flywheel even a few degrees then, I would pump lube oil out of the sump to check the oil for signs of water in the lube oil.
Assuming that the engine isn't actually seized and there isn't water in the lube oil, there is a good chance that the engine can be repaired or rebuilt and that option would probably/possibly be your cheapest way out.
Putting an outboard on the transom would be okay if you are in a benign sailing venue, and only used the outboard to into and out of your slip. Otherwise, it's not really a good option as a general service replacement for an inboard auxiliary on a boat with the amount of displacement and windage of a West Indies 36.
But frankly, installing an outboard is no where near a cheap and easy solution. This would involve getting the transom beefed up, the fuel and electrical systems reworked, adding a heavy duty outboard bracket, and the near unicorn of a large hp, long shaft, high thrust outboard.
On the other hand, people either love or hate Volvo auxiliaries. Based on my personal experience, I really hate older Volvos. They are unreliable, the parts are silly expensive, and many critical components are virtually unavailable.
If a rebuild of the existing engine is too expensive or not feasible, I would look at replacing the Volvo with either a Yanmar or a Beta. Neither would be a simple plug and play, but one of the nice things about the Beta is that they will do custom legs and engine mounts that help a little.
Depending on which engine you choose to buy, a new engine may require a new propeller and prop shaft.
Jeff