NAFA Administrator posted an articleEverything You Need to Know About Aircraft Pre-Purchase Inspections see more
NAFA member, Thomas Mitchell, Executive Vice President of Essex Aviation, discusses aircraft pre-purchase inspections.
An aircraft pre-buy inspection refers to the process by which a qualified entity or inspector examines an aircraft during a potential sale or transaction. During this process, the inspector aims to identify any preexisting damage, potential maintenance issues, Airworthiness Directives, and so on in order to protect the buyer’s interests.
The Importance of an Aircraft Pre-Buy Inspection
Purchasing private aircraft is an expensive investment, even when the asset in question is in perfect working order. Minor issues with an aircraft can incur major expenses, so it’s in a buyer’s best interest to conduct a pre-purchase inspection as part of your acquisition process.
The fact of the matter is that it’s not unusual for the current owner to believe that their aircraft is in pristine condition, especially if they’ve recently invested in upgrades to the aircraft or have files of expensive maintenance receipts to show for it. Even with all the effort and support provided by the current owner, certain items or areas of the aircraft can only be sufficiently reviewed during an aircraft pre-buy inspection.
Therefore, it’s wise for a buyer to request an aircraft pre-purchase inspection, rather than find out after the fact that there’s an issue with the aircraft. Depending on the severity of the issue (or issues) identified during the inspection, the buyer may elect to negotiate with the current owner to lower the purchase price or to cover the cost of repairs and or the implications to the aircraft value. Depending upon the structure of the transaction, the buyer could also have the option to reject the aircraft and terminate the transaction.
Even if money is of no object, an aircraft pre-purchase inspection is a pragmatic move because it often saves the buyer valuable time — time that the aircraft could spend flying rather than sitting in a repair facility. Identifying and addressing potential issues prior to purchase is an excellent way for a buyer to help ensure that they’re able to fly the aircraft worry-free for some time after the purchase is complete.
A Note on COVID-19
In light of the COVID-19 pandemic, there has been an increase in sellers pushing for quick sales, often at an attractive discount, on the condition that the buyer limit or bypass entirely the aircraft pre-purchase inspection process. Although, in this scenario, a discounted sale price can be appealing, it often comes with risk of unexpected costs after closing — costs that would have otherwise been identified during an aircraft pre-buy inspection. To that end, COVID-19 should have no influence on buyers when weighing the benefits of and protection afforded by a pre-purchase inspection, even if it increases the overall timeline of the transaction.
Potential Issues an Aircraft Pre-Purchase Inspection Can Reveal
To illustrate the importance of an aircraft pre-purchase inspection, let’s look at some of the possible issues that could come to light during the inspection process:
- Although inoperative cabin systems — such as cabin entertainment, window shade controls, and galley equipment — might appear to be minor, they are actually certified as systems that need to function properly in order to meet delivery conditions. Costs can increase exponentially if replacement parts or components for that system are obsolete or difficult to source. If discovered during the aircraft pre-buy inspection, this issue would fall upon the seller to correct.
- Aircraft are designed under strict certification. During the aircraft pre-buy inspection process, it’s not unusual to discover that certain refurbishments or upgrades made to the aircraft were not properly certified or approved — an issue that can take a long and costly process to rectify. If identified, this issue would fall under the seller’s purview.
- Any aircraft that has been repaired or modified has an extensive list of required documents, including instructions for continued airworthiness. During the inspection process, it is not uncommon for an inspector to find that these key regulatory documents have either been ignored or are missing completely.
- An aircraft that was subject to damage and subsequently repaired might now require ongoing inspections that are out-of-phase with its normal scheduled inspections. This issue could cause a new owner to experience unexpected downtime and costs.
- The type of inspection program for aircraft can vary based on its current operator and utilization. In cases of very high or very low utilization, there is a necessary process to transition the aircraft back to the normal manufacturer’s inspection program — a process that is costly, and that should come at the seller’s expense.
Why You Really Need a Pre-Purchase Inspection
Some buyers make the mistake of assuming that, since the aircraft recently underwent a major inspection, there’s no need for an aircraft pre-buy inspection. Although it’s true that a major inspection might turn up some useful information about the aircraft, that inspection is only a snapshot of the aircraft’s current condition based on a predetermined checklist. Aircraft pre-purchase inspections are uniquely designed to specifically examine and target the areas of greatest concern and have been proven to reveal trouble spots within an aircraft model that are most at risk for a buyer.
Another common misconception is that an aircraft pre-buy inspection report is unnecessary for an aircraft that’s only a few years old. Newer aircraft models naturally command a higher selling price than older models, which means any issues discovered with a newer model could have a greater monetary impact on the presumed and assigned value of the aircraft than with an older one. The fact is that even after just a few years of operation, an aircraft’s environment and operating history can be detrimental to its presumed condition and market value. Furthermore, if the aircraft is still under warranty, any issues discovered during the aircraft pre-purchase inspection may still be covered under warranty programs.
Finally, buyers often assume that an aircraft pre-buy inspection is unnecessary when the aircraft in question has a strong maintenance pedigree — for example, if the aircraft were previously owned and operated by a Fortune 100 company. Although a corporation’s assumed reputation for high standards would suggest that the aircraft was kept in mint condition, this isn’t always the case. Some corporations may have limited their aviation department budgets, which could result in the deferral of planned upgrades, refurbishments, and, in some cases, even improvements by way of recommended service bulletins.
For all of the reasons outlined here and in the previous section, the importance of aircraft pre-purchase inspection services really can’t be overstated.
Aircraft Pre-Purchase Inspection Tips
- Set realistic expectations. When purchasing a pre-owned aircraft, there are bound to be some slight imperfections, many of which the buyer can easily fix on their own. For example, cosmetic issues could be the result of normal wear and tear and have no bearing on safety or airworthiness, therefore, the seller might not be required to repair these issues in order to meet the defined delivery conditions. In this instance, it would make more sense for the buyer to make those minor improvements on their own.
In any case, it’s important that buyers not go into the process fixated on the idea of the “perfect plane,” and that they decide well in advance which imperfections they’re willing to accept and handle on their own. That said, it would be wise for a buyer to look for an advisor who can provide guidance on whether a minor issue is truly minor, whether it affects how the aircraft is certified, and whether that inoperative item might actually affect the value or safety of the aircraft.
- Work with a qualified source. Buyers should always insist on using their own, third-party resource inspector rather than allow the maintenance provider who currently services the aircraft to perform the aircraft pre-purchase inspection. This is because, having history with the aircraft, the current maintenance provider might be biased, and therefore possibly less apt or inclined to catch things during their evaluation. Buyers should look for an inspector who specializes in the particular aircraft model that they intend to buy — for example, small or especially vintage aircraft would require a different skillset and experience than a newer corporate jet or helicopter.
It’s recommended that any prospective buyer partner with a private aviation consultant to exclusively represent them, as opposed to someone who represents both the buyer and the seller. The latter might be inclined to recommend a pre-buy geared to incur the least friction for completing the transaction. A private aviation consultant can help the buyer steer clear of such risks by leveraging their knowledge of industry options to identify which resources are most appropriate and why.
- Look closely at the history of the aircraft. An aircraft’s maintenance logbook or other permanent records can reveal unseen issues. This is another instance in which it’s beneficial for a buyer to work with a private aviation consultant because an experienced consultant will know exactly which red flags to look for. At Essex Aviation, any time we work with a client to review an aircraft’s logbooks, some flags we look for are:
- Gaps in time that indicate that the aircraft sat unused for a period of time and was perhaps not properly preserved.
- Periods of time in which the aircraft recorded significant flight time, but with no corresponding maintenance records.
- Records that support the traceability of replacement parts or components; these certifications should be readily available and complete.
- Review all applicable Airworthiness Directives. Airworthiness Directives (AD) are “legally enforceable regulations issued by the FAA in accordance with 14 CFR Part 39 to correct an unsafe condition in a product.” Similar to a recall notice for an automobile, an AD denotes a safety matter with the aircraft that, if the seller fails to comply with, would be cause within the Purchase Agreement for the buyer to reject the aircraft.
- Perform a test flight. Certain issues will only come to light when the aircraft is in use, so it’s best to request test flights at the beginning of the aircraft pre-buy inspection, when the aircraft is returned to service, and prior to the final closing.
- Ask the right questions. Buyers should be actively involved in the inspection process and should ask the following questions:
– Where has the aircraft been maintained?
– In what geographical environment has the aircraft been based?
– Has the aircraft been hangared consistently?
– Has the aircraft sustained any damage?
– If the aircraft was out of use for a period of time, was it properly preserved?
These questions not only enable buyers to stay informed throughout the process, but also to avoid any potential financial implications.
- Don’t rush the process. Depending on the size of the aircraft, a pre-buy inspection can range from 1–2 days for a small piston aircraft to 2–3 weeks for a mid-size corporate jet. Note that these timeline estimates are only for the completion of the inspection and delivery of the final aircraft pre-buy inspection report; additional time will be required in order to rectify approved discrepancies. Therefore, it’s recommended that buyers budget enough time in their schedule prior to completing the transaction for a thorough pre-buy evaluation — after all, the more comprehensive the inspection, the better the outcome for the buyer.
Start Your Pre-Purchase Inspection Today
With nearly 100 years of combined aviation experience, the executive team at Essex Aviation Group has the expertise and resources to assist clients with any of their private aviation needs — including aircraft pre-purchase inspection services. Our in-house experience and vast network of industry connections includes qualified aircraft-specific inspectors capable of identifying any hidden issues, and each of our advisors have the necessary experience to walk you through the entire aircraft purchase process.
This article was originally published by Essex Aviation.
Tracey Cheek posted an articlePositioning Oneself in a Seller's Market see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares his strategy for positioning yourself in a buyer's market.
In a seller’s market, the best way for a buyer to position themselves is through a three-pronged strategy of pre-approval, extra liquidity and nimbleness. Buyers who finance may find themselves up against cash buyers. That’s why being nimble is so important. The buyer may have to make an offer on multiple planes before they finally get into first position on a transaction.
If you think you’re able to pay cash for a plane with the intention of getting it financed after the fact, make sure the transaction goes through proper escrow channels all the way to closing. AOPA Aviation Finance knows from experience that being pressured by a seller into purchasing a plane quickly without all the proper due diligence leads to bad outcomes more often than not.
Many buyers are aware that incomplete logs, damage history, or a title with a cloud over it are reasons for a finance company to nix the deal. However, in this era of heightened security measures, uncertainty where (and to whom) the money from an aircraft sale went might also prevent the ability to obtain financing. Not to mention, subject a buyer to unwanted scrutiny from one or more three-letter government agencies post-closing.
Finance companies have a regulatory obligation to follow the money. They must vet not only the buyer, but also the seller as well. This is done in order to ascertain whether money from a cash deal is destined for a bad actor on a list of prohibited persons who might possibly funnel the money to an organization on one of a number of “bad guy” lists. The simplest way to protect yourself from such close scrutiny while still preserving your potential for financing is to have the transaction go through escrow.
Buying a high-quality airplane in a seller's market has a lot to do with timing. In past seller's markets like this one, AOPA Aviation Finance has seen frustrated clients try two distinct tactics to improve their chances when their timing was off: offer a buyer well above asking price; and/or settle for a lower quality airplane.
We like to advise our clients that a tight market is a particularly important time to maintain objectivity, despite understandable temptations to the contrary. AOPA Aviation Finance helps a buyer by keeping a dispassionate perspective. However, in those instances when a buyer simply cannot remain objective, we counsel them to be prepared for one of three scenarios:
- A person dead set on paying more than where a plane ”book’s out” with the pricing digest guides needs to be prepared to pay for a valuation to justify why the plane is worth more, or
- They need to be able to shell out the difference between where it books and the asking price--in addition to the regular down payment, or
- A combination of the two
Lenders will finance an aircraft only on value as determined by an independent third party so the difference between that value and the buyer's asking price will have to be made up by the borrower. If a buyer can't afford to make up that difference without changing their global financial picture, AOPA tends to advise against the deal.
Some clients feel that settling for a lesser value aircraft at least gets them a plane. For instance, pursuing a well-appointed TBM 700 because they lost out on one too many highly sought-after TBM 850s. The thing is, it's very likely other frustrated buyers have drawn the same conclusion. They too flood the market, which boosts the popularity of TBM 700s, which artificially boosts their prices. Short term win, but long-term loss. That's because the market will inevitably reverse. When it does, the 700 will likely depreciate faster and farther, thus commanding less in resale as a result.
Is it worth it to bet that you'll use and sell that lesser plane before the market turns? Is it worth it to take that risk in a market whose output is only a few thousand aircraft annually, and whose market is heavily dependent on a robust economy? A conversation with an AOPA Aviation Finance expert can help guide your decision-making and help hone your acquisition strategy.
This article was originally published by AOPA Aviation Finance Company on July 8, 2019.