Opening Disclaimer: I have an E46 M3 w/ SMG II and love it.
I think the SMG is actually a very enjoyable transmission. It is rough at low speeds, in traffic, etc, but once you are on the throttle and driving hard it really does fit the S54 engine and the feel of the car. Having driven a GTI w/ DSG (their DCT) and spent a little time in a DCT equipped E92 I actually like the SMG better as far as feel goes. But that's personal preference and also it helps that I don't daily drive my M3.
As for the idea of getting a 335i instead; that's not really apples to apples. The 335i is great, but it's no M3. The two cars are very very different. Before I had my M3 I had a 135i and while it was a fun car, great torque, etc it's not an M-car.
But to the original question, I don't think I'd buy it because of the red flags the seller is putting up. I bought mine on a bit of an impulse and ignored some issues I should have seen and it's cost me a fair bit of money to bring my M3 up to my standards.