Re: '85 25 hp EVIN. rebuild?
If it was sunk, then not dried out and run after it was retrieved, it will likely need all internal steel bits replaced. That includes crankshaft, rods, all bearings, and rings. May need some of the electricals replaced, too, as the stator has some steel laminates that can rust if left wet. Depending on the rust condition inside, the cylinder walls may simply need a honing to clean up any rust.
Before committing to anything, I'd tear the powerhead down to the last bolt and see how bad things look. Sometimes you get lucky and water didn't get into everything.
Yes, the motor block comes off the exhaust housing. I would indeed pull the lower unit, if for no other reason than if you're going to rebuild the powerhead, you might as well put an impeller in while you're at it...