Early Bird Gets The Worm!

09/24/2018

This was a disappointing week for one of my clients. I have been working with this gentleman for several months now to represent him in the purchase of an aircraft. Recently we found what we believed to be an exceptional deal on a pressurized twin-engine cabin class aircraft, one we actually traveled to see and visited with the owner. After several rounds of discussion, we got the owner to agree that our original offer on the aircraft was actually a good and fair price given the current market conditions.

As with any aircraft transaction, the Buyer will typically provide the Seller with what is known as a Letter of Intent (or LOI), a document that outlines an agreement between two or more parties before the agreement is finalized. The LOI formally lets the Seller know that the Buyer has a desire to purchase the aircraft but it is not a binding contract, it is not an agreement, and this is always stated in the content of the letter itself. What the LOI outlines are basic terms of an agreement to follow: the price offered to purchase the aircraft, when and where the pre-purchase or pre-buy inspection will be conducted, and what kind of deposit is being offered on the aircraft.

Additionally, and most importantly, the LOI states that both Buyer and Seller agree to execute an Aircraft Purchase Agreement (or APA), the legal document, that outlines the different conditions and terms that are related to the sale of the aircraft. An APA creates a legally binding contract between the Buyer and Seller and any lending institution looking to fund an aircraft purchase will always require it.

Since the APA defines exactly the terms of the aircraft purchase, most Buyers want to ask for everything they can possibly get from the Seller in terms of protection and flexibility. Buyers will ask to transport the aircraft to another location so that the pre-buy inspection may be performed by a third-party mechanic or shop of their choosing, for the Seller to share in escrow fees, for the Seller to pick up the cost of airworthy squawks and discrepancies found in the pre-purchase inspection, for minimal compression values on the engine or engines... and the list goes on and on. But while they have every right to ask for whatever it is they seek in terms of provisions that protect their purchase of the aircraft, the reality is that these deals have a tendency to become very complex and the Seller may perceive the Buyer as being overly risk adverse or not very realistic about buying the aircraft.

Such was the case with my client, the Buyer in this case. My client had never purchased an aircraft of this type and wanted to make sure that he was getting every provision possible to mitigate his potential risk. For this reason the APA got muddied with provisos looking for multiple concessions on the part of the Seller.

The Seller on the other hand was in a bit of a financial bind, and needed to sell the airplane as quickly as possible. He had reduced the price to a point that was far less than he had planned and therefore was of the opinion that the sale should be "as is where is. " In his mind, the provisions the Buyer had requested in the purchase agreement made it clear that this was not going to be a quick and easy transaction for him.

We had been told that the Seller had another party looking at the airplane but my client felt that this was gamesmanship since we had just looked at the plane and no one had seen it for months. The Seller however had done what any good and diligent Seller would do; he contacted people that had inquired about his airplane to let them know that he had lowered the price and in doing so, got a previously interested party to submit an offer. As it turns out, the offer was for less money than the offer made by my client... but is was simple and the Seller took it.

Aircraft are complex machines and the complexity of the purchase process is typically commensurate to the complexity of the aircraft itself. But, in an effort to simplify the decision making process, I always employ what I affectionately refer to as The Engineer's Rule: "Measure it with a micrometer, mark it with chalk, and cut it with an axe." Let me explain.

If you rank the items on an aircraft that present the largest potential financial risks to the owner, they rank as follows: Engine(s), Airframe (including AD's and required inspections), Avionics and Logbooks & Records. Looking only at these four items, it becomes relatively simple to quickly assess the purchase risk of a piston aircraft with four simple items: a compression test of the engines, a review of the logbooks for AD compliance and damage history (337 forms and work orders should also be reviewed), a visual inspection with a landing gear retract to assess general condition and corrosion, and a test flight for an aircraft systems check. Performing these items alone does NOT constitute a thorough pre-purchase inspection but, when an aircraft is significantly underpriced, as was the case with this airplane, they can give the Buyer a quick idea of where the most significant potential risks lie in order to determine the bottom line of the transaction.

For example... Say you're looking to purchase a 3,500 TT Bonanza with 700 SMOH on the engine. The average book retail price of the airplane is $176,000, wholesale price is $146,000 and the owner is firm on his asking price of asking $130,000. The question you are looking to answer here is: Is this a good deal?

A compression test shows that two cylinders need replacement at $2, 000 each. The tires are checking and will cost about $1,000. The airplane is coming up on an annual and a good annual inspection may cost $3,000 so double the price to $6,000 for unknowns. Finally, it will cost you 3 days and about $2,000 to go get the airplane back home so all in, we're up to a very conservative $13,000. Adjust the values of the airplane upwards by half of the avionics cost or $4,000. Would you buy it as is where is over the telephone on the advice of your consultant?

An aircraft purchase will always, without exception, carry some element of risk for the Buyer. The secret comes in assessing the level of risk quickly; determining the range of your downside exposure, and making a prompt decision while keeping the deal relatively clean for the Seller. If you are inexperienced, risk adverse or if this is your first airplane purchase, consult a professional that you trust to provide you the information you need to make an informed decision but once you have it, to use my son's vernacular, "strap on a backbone" and make the decision. This simple operating philosophy will almost always put you in an excellent position to get a great airplane at an exceptional price.

Finally, and to illustrate my point, I heard of a pilot who bought a Cessna Citation I over the phone in Osaka Japan, had it flown to the US and sold it. The airplane was being offered at 50% of book wholesale. Four "professional" aircraft brokers were all clamoring to locate a buyer for the airplane so they could sell it for a huge profit without taking any risk. When the airplane sold to the pilot, one particular broker became so incensed that he called the buyer inquiring how he, "... who wasn't even in the airplane business, could end up getting the airplane when 'professionals' had been trying to buy the airplane for months" to which the new owner simply replied... "It was so simple. I wrote the check."