Went to my indy shop today. He's a certified BMW tech. He put it on an incline, then did basically dmax's technique, but with the defroster on and AC off.
We let it cool and eventually had to add some coolant, but the temperature got to warm at best. He still suspects it is the heater valve that has gone bad, but after blowing on the valve when opened and closed, it seemed like it works as it should. Any other ideas?