Purchasing Newly Renovated 20-door motel to turn into Sober Living thru owner finance

[Katrina Dividina]

Hi, 

I have 4 SFH and a 4plex doing LTR and MTRS in New Mexico, now, I have the opportunity to talk with a motel owner who is willing to do owner financing. His motel has been shut down since COVID-19 for not being up to code, now, he has renovated it and water/electricity is running. He is asking for 800k, 25% DP, and 9% interest which I think is ridiculous for owner financing. I am a nurse and I have an addiction MD partner planning to turn this 20-door motel into nonprofit sober living which the area is in desperate need of. Medicaid will pay for each client/tenant.

I tried to call several appraisers but 2 of them who responded refused to do valuation. Its hard to find appraisers to service this area. They usually have to travel 2.5 hours.

My questions are:

1.) Does it have to be specifically a hospitality appraiser or can just a commercial appraiser do it? One of the appraiser has been asking for rent rolls but the motel has been shut down since covid. 

2.) What documentation do I have to do during this 1st part of my acquisition before I do my whole due diligence? Letter of intent to the owner? 

Can someone tell me the step-by-step? My partner is a member of Andersons Advisors, I just want to have an Idea of how can we work around this deal.

Thank You

Katrina

[Mitch Messer]

Hi @Katrina Dividina!

Without more context, it's impossible to know whether the owner financing terms are reasonable or "ridiculous." 

And, even if you could find an appraiser to do an evaluation, it's not clear how that would help you.

As you state, the motel has been shut down for nearly three years, so there's no current financial data.

But even if you had recent numbers, you're planning to operate it as a sober living facility, which I suspect is a very different business model.

You need to find a comparable facility in or near your local market and develop your own customized financial analysis model based upon this particular property.

Then, given your business objectives (cash flow and cash-on-cash return, I assume), you'll need to back into what purchase terms you'll need to achieve those objectives.

Only then will you be able to determine whether these seller financing terms will work.

As far as documentation to get started, a letter of intent (LOI) is commonly used but you might move straight to a purchase and sale agreement, particularly if no agent is involved.

Whichever path you choose, just be certain to give yourself plenty of time to thoroughly perform your due-diligence. Vacant properties with previous code violations can be extremely tricky!