Like mentioned earlier, it appears your swivel shaft is leaking. I'd pull the transom housing off the boat and change the transom seal and give everything a good look over. You don't want any surprises after it's all put back together.
Myself, if I bought a 26 year old boat and never seen it float, and had the motor out, I would make damn sure that transom housing was leak free before putting the motor back in. You could always put the drive back on and take it to a boat ramp with no engine, for a look/see.
Also on a side note, this is my pet peeve with projects... They are a hole and you just start tunneling and finding more things.. lol
Sounds easy enough :laugh: