Re: First Resort - Posted by ray@lcorn
Posted by ray@lcorn on October 20, 2003 at 14:01:07:
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.