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Tips 5 - Some Buyer's Tips
By: Jerry Temple
As written by Jerry Temple
Publication of this article appeared in: The Twin Cessna Flyer, Dec. 1995
In recent issues of the Twin Cessna Flyer Newsletter I have written about the Cessna 310 and 340, the use of an Escrow firm for ALL aircraft transactions, Logbook security and the epidemic of "Bad Guy" Dealers and Brokers. And, I cautioned that there can be major problems for a Seller, from private individuals (non Dealer/Brokers). For every Bad Guy Dealer/Broker story that has been told to me, I can share a bad experiences for Buyers arising from dealings with private aircraft owners.
Callers to JTA often have a few basic questions regarding aircraft transactions. Some are first time airplane Buyers and some say they purchased several airplanes. Nevertheless, I am continuously shocked by the lack of knowledge of the process and at all the sales that are made with subsequent administrative problems and costs. There is a great deal more to a proper aircraft acquisition than just a Pre-Purchase Inspection and Evaluation Flight. Pilot's pride and ego. Watch out!
Perhaps it is wise to have a professional making sure no mistakes are made, especially if that expertise is costing you very little or nothing. It is so logical it is hard to sell. So here are a few Buyers tips. These are free. Regardless if you go it alone, or have help, some actions are essential.
Title Search: There are many licensed and insured Aviation Title and Escrow firms. A Buyer can use such a firm to conduct a Title Search. Keeping things simple, a Title Search shows the name of the registered Wwner. It may be a private party, a business, partnership, etc.
The Title Search will also show if there are any liens against the aircraft. I did not say against the registered owner, but the aircraft.
The most common type of lien is the Security Lien by a lender. It is real simple. There is an outstanding loan on the aircraft and a bank has a lien against the aircraft. When the aircraft is sold, the Security Lien is first satisfied, before the registered Owner receives any money. I cannot tell you how many times this simple situation, just like an auto loan, causes Buyers (new Owners) nightmares and additional money.
Another common lien is the Mechanic's Lien. When a shop has a dispute with an aircraft Owner, the shop can file with the FAA a lien for the disputed amount.
I can almost guarantee you that if a lender is involved in the proposed purchase of an aircraft, they will have a Title Search conducted just prior to funding. No lender will fund on an aircraft unless arrangements are in place to insure that all liens are completely satisfied and that this "New Lender" may now place its Security Lien against the aircraft and be in the first position of security.
In order for the system to work, all lenders trust these licensed and insured escrow firms. Therefore, a lender with a Security Lien against an aircraft will issue a Lien Release stating that the lien has been satisfied, and they will give it to the escrow firm. Therefore, when an aircraft is being sold regardless if the funds coming to the escrow firm are from an individual, or from a lender, that Buyer, or his bank, knows that the loan will be paid off before the current Owner receives any money. And, a current Owner understands, that Escrow will pay him only after all liens have been satisfied.
As I have previously written, the use of an escrow firm to handle ALL money actions, and perhaps a professional aviation sales/brokerage firm will make sure that all liens are addressed. And, when a new lender is involved, arrangements for Lien Releases, will be absolutely required, as a function of closing.
A Title Search just before closing is wise in order to insure liens not being placed against the aircraft that a Seller may not even be aware of. A Mechanics Lien is a good example. In most states, there is no requirement for anyone placing a lien against an aircraft to inform the aircraft's owner.
Often an owner discovers the existence of a lien against his aircraft, or a Buyer discovers such, because of a Title Search. Even if an Owner/Seller says it has been paid off, or it should not be there, it is still considered a "clouded title" and no lender will fund on such a clouded titled aircraft.
And further complicating the whole clear title subject is the fact that a lien can be placed on your aircraft by a party you have had no business dealings with. Example: Last year a retired Dallas area airline pilot contracted with me to sell his aircraft. He told me he had paid cash for it and owned it "free and clear". Upon doing my due diligence, I discovered a Mechanic's Lien for several thousand dollars. This dispute was actually between a Houston mechanic and the aircraft's previous owner, but the title was clouded and I knew it could not be sold until this was resolved. No private party Buyer, and certainly no lender, would fund on this aircraft. No Title Search had been done at the last closing. The current Owner was forced to settle with the mechanic or not be able to sell the airplane. Yes, the current Owner can turn around and sue the mechanic. One can sue anyone, but this is just more expense and aggravation. The proper groundwork simply had not been done. This is often the case in sales between old friends, hangar neighbors and in other "non-stranger" situations.
In addition, another action that is becoming more common is lien actions by a Broker against an airplane. There are legitimate cases where an aircraft Owner has tried to avoid paying a Broker an earned commission. There are cases where a Buyer and Seller try to structure a deal so a Broker, that has provided both parties with professional services, is cut out of a due commission. The Broker can cloud the title taking the perceived benefit away from the Buyer and Seller. Sure, the Seller can sue the Broker, but if the Broker has good evidence, the Owner/Seller will now not only owe a commission, but will have likely lost the Buyer.
Lenders may also require formal appraisals. This is smart, even if you are paying cash. And an appraisal is very smart after you have purchased an aircraft. If you ever have a dispute with an insurance firm, your having a current appraisal will make the battle much easier. And if an Owner were incapacitated or dead, the estate is less likely to be taken advantage of at a tough time with a good appraisal on file.
Another smart piece of research is the Chain of Title. This is different from a Title Search. The Chain of Title shows chronologically, from day one, the name and address of every registered owner. It will show every actual "user owner", dealer/broker or lender that has ever owned the aircraft, even just "paperwork" owners for a day.
The dates of official FAA registration are also shown so you can see how long an owner owned the aircraft. This is how you tell where an aircraft has "lived", and how long was it in a certain location.
For an extra fee you can get a FAA Form 337 Report usually as part of the Chain of Title Report. The FAA Form 337 is titled Major Repair or Alteration and applies to the Airframe, Engines, Propellers and Appliances. In reality there are good 337s, not so bad 337s and bad 337s. Many 337s are routine and perhaps positive alterations that require a Form 337 be submitted. Examples are the addition of a Loran/GPS, Air-Conditioning, and other good products or improvements. Many do not require an STC (Supplemental Type Certificate).
Few twins will not likely have never had a little "fender bender". A 20-25 year old airplane may have had a couple of hangar rash incidents in which a 337 was submitted along with a Logbook entry. That is okay. It is our system.
And, in many cases, major repairs have been made. Again it is very common for a 20-25 year old Twin to have at some time been down on a gear. Repairs and Logbooks entries were made and a 337 submitted. Hey we have all got a past.
A Buyer and/or the Buyer's representative, and the Seller's representative should have both Chain of Title and all 337 reports.
Title Insurance is expensive and really not needed for a Twin Cessna if Title Searches are conducted not too long before closing.
Title Searches, Liens, Appraisals, Chain of Titles, FAA Form 337s (Damage Reports), Title Insurance, are all a part of an aircraft sale. Purchase Agreements and Escrow Agreements? Yes I know old Ben three hangars down is a great guy and really always "took care" of his airplane and after all old Carl always maintained it. And hell, why spend for all this escrow and title stuff. That os for jets and big airplanes.
Okay Mr. Airplane Buyer. Yes, you may fly in a thunderstorm, and yes you may check the fuel quantity with a lighted match, but you are braver than me.
(Jerry Temple is President of Jerry Temple Aviation, a Frisco, Texas (North Dallas) based aviation brokerage firm that specializes in Twin Cessna's).