Joe, the problem you'll have is that the tstat is no longer made for the 261 bypass housing. If you search past posts on the subject, you will find lots of info. I beat this up about a year ago with lots of input from other members.
Yes, a non-bypass 235 housing can be substituted but without the bypass feature. Like you, I believe in how GM designed it, so here is a link with instructions of how to convert a 235 housing to one with a bypass. I run this design and it works great. Very easy, simple...and it works!
https://www.stovebolt.com/ubbthreads/ubbthreads.php/topics/1163443/Re:_Converting_a_216/235_therm.html
The modified 235 housing will only work on a late model 235 or a 261 with a low water pump. It won't fit an early 235 or a 216 with a high water pump.
If you decide to use the modified housing, don't buy a dual outlet water pump like the one I sent you in the link. It won't fit because the upper casting hole is too close to the modified housing. (I know from experience because I bought one for the 261 under construction in my shop!) You'll want to use a single outlet water pump and tee into the heater return line as described in the instructions on the modification link.
If you have trouble finding the cone-shaped belt pulley that attaches to the water pump, send me a PM. I might have one laying around. Just an FYI...it is the exact same pulley on any late model 235 water pump.
Matt
