AIRCRAFT PURCHASE – PROCESS AND GUIDELINES
Aircraft Purchase/Sale Guide
Purchasing an aircraft is an exciting, complex and multifaceted process that should be done with the help of a team professional. Aircraft acquisition process should involve a team which includes a qualified aircraft broker, aircraft title and registration company, certified A&P mechanic, aviation attorney, CPA and aircraft financing company.
1. AIRCRAFT MISSION RESEARCH
As the buyer, you should know what you are looking to buy. There are thousands of aircraft types and models in the market to choose from. To narrow down your search, you have to assess your needs.
- Are you a weekend pilot? Recreational pilot? Business pilot? Corporate business owner / traveler? Aviation business owner /operator? Private Jet traveler?
- What is the purpose of buying this airplane, what are mission roles of the airplane?
- How many people would fly in the plane normally and how often ?
- What kind of operational economics are you looking to get?
- Single engine, multi-engine, piston, turboprop, jet etc ?
- What kind of range and flight altitudes do you need for majority of the flight missions ?
- How many passengers seats and how much cargo space you need ?
- What kind of weather regions are you going to operate and what equipment do you need for it ?
- What are your pilot qualifications? Are you planning to use professional pilots ?
- Are you going to use this for personal use or commercial use for revenue?
- Which is your base airport? Any operational or maintenance constraints ?
- How many hours do you expect to fly the airplane annually ?
- What kind of maintenance and operating costs would be ideal for you ?
- What is your acquisition budget range? Is it flexible, how much ?
- Would you prefer to buy new or used? Pristine shape or fixer-upper?
- What is your acquisition financial strategy, self funded, financed ?
- Is the aircraft going to be a personal property or business property ?
- What type ownership strategy should you use for financial and liability reasons?
- What is the Tax strategy for the aircraft acquisition ?
- How soon do you need to acquire the airplane ?
JetEXE Aviation’s team of consultants and brokers can guide and assist you in narrowing your search and finding the right aircraft for you. Based on your needs and purchasing power your assigned consultant and broker will identify and shortlist the aircraft’s that are available in the market for sale. For further investigation you may then visit the airplane, and do the initial look around. You may even request a demonstration flight but this is normally done at the purchases expenses. After visiting and looking at a few different aircraft off your choice, you will get a fair idea of what is available, what are the options in the market and what is the pricing.
2. LETTER OF INTENT (LOI)
Once you select the aircraft that you would like to purchase, a letter of intent [LOI] is drafted with the general terms of the purchase setting forth the purchase price, deposit, terms, inspections, expiration of the offer etc.
Your broker can assist you in this process and your advised to consult an attorney before signing any agreements. Through the letter of intent both parties express their expectations and see if the primary terms are agreeable.
If the LOI is accepted by the seller, the buyer immediately places a deposit of 5% to 10% of the offered purchase price. The deposit may be placed with the broker or the aircraft escrow company that has been mutually selected by the buyer and seller. Most of the aircraft escrow companies in the USA are located in Oklahoma, near the FAA headquarters. Before the LOI expires, the aircraft should be inspected by the buyer and essays agreement signed.
4. PURCHASE AGREEMENT
The aircraft purchase agreement should be drafted by a qualified aviation attorney. Your broker or consultant can assist you with this. The aircraft purchase agreement will have all the details of the terms and conditions of the sale and purchase.
- Normally the aircraft purchase agreement should have at least the following:
- Purchase price, deposit and terms of payment.
- Terms of deposit, whether refundable or nonrefundable at what stage of the process.
- The time period provided for repurchase inspection, representation by both parties, type of inspections.
- The warranties or guarantees provided with the airplane, if any.(Used airplanes may not have any. The normal warranty for used airplane is that the “title” is warranted. The condition or air worthiness of the airplane is not)
- The pre-purchase inspection is to determine the condition of the aircraft as represented by the seller. If seller has misrepresented the airplane, the buyer may withdraw and get a refund of the deposit.
5. PRE-PURCHASE INSPECTION
The pre-buy inspection normally is conducted at a maintenance facility which is selected and agreed mutually by the buyer and seller. The broker may assist you in selecting the right facility for the type of aircraft your purchasing. Choosing a facility that is experienced and highly qualified to conduct such pre-buy inspections is of absolute importance. A good pre-buy inspection will save you a lot of headaches and worries that may arise if you don’t do one, after your purchase. We buyer pays for the pre-buy inspection and can choose to do an “annual” inspection which is more comprehensive than a pre-buy inspection.
The aircraft is inspected thoroughly by the appointed inspectors. The aircraft documents and logbooks are inspected thoroughly. After completing the inspection the inspector will provide you a list of deficiencies & discrepancies if any. You may also ask the inspector to provide you with an estimate to rectify all the deficiencies and discrepancies.
If the deficiencies and discrepancies where not noted earlier when the aircraft was offered for sale, the buyer may negotiate with the seller to either fix the discrepancies send deficiencies or negotiate on the price. This negotiation should be conducted immediately and agreed upon without delay.
6. ACCEPTANCE OF AIRCRAFT
Once the negotiation is concluded between the seller and buyer and decisions have been made as to the new terms and conditions of the purchase, discrepancies or price. The purchaser within execute the acceptance certificate. This is a written commitment by the buyer to purchase the aircraft subject to the new terms, discrepancy resolution and price. The deposit placed by the buyer normally is nonrefundable once the buyer signs the acceptance certificate.
7. CLOSING AND DELIVERY
This can be a very complex and multifaceted process with procedures that need to be accomplished in a timely manner. Aviation consultant are broker would absolutely be an asset to conduct this process for you, without complications.
At this point, the seller and buyer open and escrow account with a mutually agreed aircraft escrow company. The escrow fee is normally split between the buyer and seller. This fee can run anywhere from $500-$5000 depending on the complexity of the transaction, and size of the transaction. International escrows may have additional costs. Oftentimes the buyer and seller may not be in the same location and could even be in two different countries. The broker, attorney and escrow agent together works seamlessly to accomplish the sale, transfer of funds and transfer of title without complications.
Often the buyer and seller may not be at the same location so the process can be conducted through to the conference or Internet conference. All parties involved in the transaction should be in the conference.
If the aircraft transaction is international, and IR form needs to be documented in the” International Registry” of mobile assets. Your broker/consultant and escrow company can assist you with this process.
- Buyer and seller will provide written instructions and details required by the escrow company for the transaction, disbursing of funds.
- The broker/consultant, will secure assigned bill of sale from the seller and provide a copy to the buyer.
- The buyer informs the escrow company that the sale has been accomplished
- Seller informs escrow company that the state has been accomplished and sends a copy of the bill of sale.
- Buyer instructs the escrow company to disburse the funds as per agreed instructions.
- Escrow company disburses the funds as per the instructions.
- Seller and broker confirms receipt of the funds in his account and informs the escrow company.
- Broker then has over the original bill of sale to the buyer and sends a copy to the escrow company with the new owners name.
- The buyer purchases appropriate insurances that are required for the aircraft.
- Escrow company then applies to the FAA aircraft registry, for a transfer of ownership title and registration to the new owner.
- The new owner or his representatives immediately takes possession of the aircraft.
- Once the bill of sale is signed, the buyer is effectively that you owner of the aircraft and is fully responsible for it.
Delivery of aircraft may be arranged by the seller or the broker, but this is completely separate from the aircraft sale. At this point you have to understand that the aircraft’s own by you and choosing the right delivery means and methods would impact the safety of your aircraft.
8. POST CLOSING TIPS
This is a great moment. You have purchased your dream airplane. Do not let this exhilarating feeling override your due diligence on operating or ferrying the airplane. Remember that this airplane is new to you and you or your crew have to familiarize with the aircraft well before using it or transporting it.
If you’re using a broker or an aircraft logistics company they can assist you in transporting, ferrying or training the crew for the same.
The location from which the first flight originates and terminates can effect be taxes on the airplane purchase. Aviation consultant or a CPA can advice you on this matter. Each state and each country has different rules and regulations regarding this.
The aircraft should be fully airworthy and inspected before ferrying our transportation. Properly trained and experienced crews should be assigned for the ferry or transportation of the aircraft. If you are flying the airplane you should be properly trained and familiarized with the aircraft before doing this
All navigation databases and subscriptions should be up-to-date in order to fly the aircraft legally. Ensure that all documents that are required to be on the airplane our current, before flying it.
If the aircraft is going to be flying over 29,000 feet it should be RVSM certified and is required manuals must be approved and find at your local FAA flight standards district office. Your aviation consultant/broker can assist you with this. If it’s a long-distance very it has to be planned well with fuel and maintenance stops.
Before flying or ferrying the airplane, make sure all aircraft manuals, equipment manuals, warranties, service contracts etc. are transferred to the new owner and the documents provided. Some warranties may have a transfer fee or user fee applicable to the new owner. Most software subscriptions and updates would need to be transferred or subscribed by the new owner.
Make sure the aircraft log books are safely transferred to you. Immediately make a copy of all documents and aircraft logs, for safe keeping.
Caution: If the aircraft logs are lost or tampered the value of the aircraft will reduce up to 50%.
COMMON MISTAKES BY BUYERS
- Aircraft sale and purchase process is very complex and multifaceted and can go badly wrong if it’s not done properly. To save the comparatively small amount, new buyers may try to do the process by themselves. This can end up becoming very costly in many ways, including injury, damage, loss of funds or loss of life. The negligible cost of using a consultant or broker will guarantee you peace of mind and a smooth transaction.
- Not conducting a proper research to narrow down the exact type of aircraft that would fit your needs and budget. An experienced consultant is broker can make this job easy and effective for you.
- Trying to save money on pre-purchase inspections, thereby overlooking or not finding many major discrepancies that may be present. This can become very expensive when you later discover that there are hidden discrepancies in the aircraft, equipment and engines.
- Buyers over negotiating on discrepancy and purchase price after pre-buy inspection. The buyer has to be reasonable in this negotiation otherwise the seller may withdraw the agreement. Often buyers lose the deposit money if the negotiation is not reasonable.
- Not using an escrow company to assist in the transaction process. Buyers and sellers have often been cheated out of the money or aircraft when the transaction is done directly with the seller/buyer without the neutral escrow agent. The escrow agent will ensure that the process is secure and streamlined.
- Not ensuring that all documents that are required be filed in a timely and appropriate manner including bill of sale, transfer of registration, insurance, IR documents etc.
- Performing the purchase without tax planning and not locating the origination and delivery flights appropriately.
- Not obtaining appropriate insurances before the transaction is complete, opening up possibilities of losses.
- Using inexperienced crew for transportation or ferry, that can cause potential harm or damage to the aircraft and crew.
COMMON MISTAKES BY SELLERS
- Not conducting the proper market survey to understand the actual current value of the aircraft and using list prices on websites and magazine to ascertain or appraise the value of your airplane.
- Trying to market and sell the airplane without using a broker or consultant, for small savings. First time sellers often try to accomplish this and end up wasting many months or years trying to get the right buyer and price.
- Trying to market and sell directly, exposing the seller to various unknown parties who can cause potential harm or danger to the seller or family.
- Not getting discrepancies/squawks fixed before offering the aircraft for sale , causing the value and marketability to be lower and opening more ends for negotiation by buyer.
- Over negotiating on terms and conditions of sale, discrepancy resolutions, and purchase price. This can cause many potential buyers to walk away from the deal and sales agreements fall through.
- Not using an aviation escrow company for the sale process, ending up with complications such as losing the airplane ownership due to improper or untimely documentation and potential loss of funds.
- Not disclosing the exact condition of the airplane and its history to the broker and seller when it is offered for sale . This is the biggest mistake that a seller can make. This can come back to litigation at a later time. It is always prudent to disclose the complete known history and condition of the aircraft to the buyer and broker, in writing, before the LOI and pre-buy inspection .
- Not Planning the tax matters involved in the sale with an aviation experienced CPA.
- Not completing the required documents for the sale , transfer and registration of the aircraft in an appropriate and timely manner, causing potential for complications and litigation’s .