explain to the owner that he is asking to much and show him on paper why you feel its to much ,he might think its worth what he’s asking,give him some comps to look at and make a offer of what you think it will support,and don’t forget to add a few bucks in it for your services you need to get paid too, if he won’t lower his asking price move on ,no use in buying a property that won,t support itself and lose it in a year or so because you can’t afford the payments
Hi,
I am interested in purchasing a small resort along the banks of a popular fishing stream. It is tastefully appointed, has cabins, RV Park, and a nice lodge. The problem I’m having is that it is so nicely built that the seller is asking an enormous price, I believe to get paid for his hard work at his craft. In any event, the rentals will not support the debt service.
My wife and I are willing to work hard at making this business more successful (there is great potential for increasing revenues), and we are able to offer 10% down. The problem is that even with a best case scenario it will still be hard to meet debt service on his asking price (and nothing left for us).
I am looking for some creative financing options. All advice will be appreciated. I would also like to know if there is an industry standard for vacancy rates for seasonal resorts?
Posted by ray@lcorn on October 20, 2003 at 14:01:07:
DKC,
It is very hard to structure any finance terms that will make overpaying for a property make sense. When you pay too much, you are essentially giving over the increase in value for your own work to the seller.
That said, if the seller were motivated you may be able to structure terms that would make the property feasible on a cash flow basis. Interest only notes, a cash flow mortgage (where the payments are capped at a maximum percentage of cash flow after management), or debt forgiveness of seller held financing with a discounted payment with refinance proceeds some time in the future are tools that have been employed to deal with a situation where the over priced asset has long term appreciation or alternative use potential.
But a seasonal resort is not the type of property that lends itself to overburdened debt service. The highest debt service coverage ratios in the finance industry are reserved for hospitality properties, and with good reason. It is a cyclical business at best, and the seasonality increases the volatility. I’m in the hotel business, and can attest to that volatility. The last two years have been terrible for many resort properties, and it can get worse. Many resort properties close completely for the off season, and especially when the market is already soft.
One key to success in real estate is knowing when to walk away from a deal. My advice would be to tell your seller to contact you if he doesn’t find a buyer that will pay his price. Leave him with the thought that you love the property and would be an owner-operator that appreciates and preserves the value he has created, but you have to have a return on your investment as well. If he isn’t willing to leave enough room in the deal for the next owner, there won’t be one.