Buying In

Tips for speeding your loan

Like someone preparing to apply for a home mortgage loan, if you are a prospective aircraft buyer, there are several things that you can do to speed the consideration of your financing request.

"The first thing that you should do is sit down and review your credit history," said Bud Walker of NationsBank, which administers the AOPA Air Power Loan program. "You can get a credit report from your credit bureau or just review in your mind how you've handled your credit." Have payments been made on time? Are there any repossessions or credit disputes on the report? "The most important thing any creditor is going to look at is what kind of track record you have."

Next, consider whether your dream machine is compatible with your finances. "We would all like to have a brand-new SIAI-Marchetti or whatever, but be realistic about what you can really afford." Walker said that the creditor is going to look at the payment on the airplane, as well as charges for tiedown or hangar, insurance, fuel, and maintenance. "Take a real hard, realistic look at what owning that airplane's going to be — and be realistic about what you're going to be able to buy," Walker added. "Don't count on leaseback or rental income to 'swing' the financing deal if you don't have the cash flow to pay for it alone. When you're talking about an aircraft financed over 10 or 15 years and a lease that might be for one year, the lender can't put a lot of faith in that."

Ask prospective lenders about any fees that you will have to pay in connection with the loan. "Interest rates may be a very deceptive way of determining what a loan is going to cost you," he said. Borrowers may be required to pay "points," a percentage of the total loan amount paid up front as a fee. Some "fixed-rate" loans may have to be renegotiated after three years. Are there prepayment penalties? "These are things that are potentially going to cost you money down the road."

Submission of a complete, detailed information packet will speed processing of a loan, according to Walker. Be sure that the credit application is thorough and complete; include a current personal financial statement (no more than three months old) and some form of income verification (payroll stubs and copies of W-2 wage and tax statements for employed applicants or two years of personal income tax returns, including all schedules, and two years of business returns for self-employed individuals).

Also submit a complete description of the airplane, including photographs. Are the original logbooks complete and available? How many flight hours since new? How many hours since the last engine overhaul? Explain what the aircraft will be used for, how much and where it will be flown, and where it will be based, Walker added.

"Take the time to put together a complete application package. The more information that you have available and the more detailed your credit package is, the easier it is for that lender to analyze the information. That's the one area where the applicant has the ability to expedite his loan request or hinder his loan request."

Of course, a title search and adequate insurance are required. "It amazes me, the number of people who buy airplanes and never do title searches," Walker commented. "We do a title search ourselves anyway. As a bank, we're not going to release funds to the customer until any title problems are cleared up."

He is also amazed by people who buy an aircraft and don't want full insurance coverage on the hull. "Every lending institution that I know of requires full insurance coverage on the airplane, just like a car," Walker said.

Not long ago, most lending institutions would finance 75 percent to 80 percent of an aircraft's purchase price. "Today 80 percent is the norm, and 90 percent is available through a lot of lenders," Walker said. "The market has been extremely stable because there are no new aircraft out there, and the values are steadily increasing. We offer terms of 15 years, and one of our competitors offers 20 years. Most lenders tend to put a cap at 10 years."

"It really does help to pick an institution that understands airplanes," Walker observed. "A lot of airplanes out there today are selling for a lot more than the [Aircraft Bluebook-Price Digest] says they're worth. Someone who's not familiar with the market for the aircraft might have trouble with a purchase price higher than the Bluebook amount. That's where someone who understands the marketplace can help out a borrower more."

Rob Henning of Clarksville, Tennessee, would agree with Walker's suggestion. When Henning, a clothing retailer who owns several small shops, decided last August to purchase a Grumman AA- 1C with a 160-horsepower engine conversion, he called the local banker who handles his personal and business accounts.

The banker wanted to lend Henning the money, he said, "but she was very apprehensive about the airplane." He ended a brief period of uncertainty by obtaining a loan from a lender that specializes in aircraft financing.

Larger banks generally don't want to fund experimentals, or aircraft purchases in general, because "it doesn't fit the mold," said Tom Harvell, president of Lakeland, Florida-based National Aircraft Finance Company (Nafco).

Even traditional aircraft lenders don't like to finance aircraft more than 20 years old, Harvell said. "Almost 80 percent of your airplanes out there today are more than 20 years old. We look more to condition than to age." Increasingly, aircraft refurbishment is boosting aircraft value and extending service life, he observed.

The experimental and ultralight markets are growing rapidly because of the high cost of new production aircraft, according to Harvell, who said that 10 times more kits than production aircraft were sold during 1994. "That's not to say that all of them will get built, but a fair number of them will."

NationsBank doesn't finance homebuilt aircraft, Walker said. "It's hard to really put a value on homebuilts," he explained. "You could line up 10 Glasairs and no two of them will be alike — there are differences in workmanship, differences in equipment."

Experimentals are becoming a major part of Nafco's business, however. "I spent two or three years lining up and getting comfortable the funding sources that would finance this business," said Harvell, who has worked in aircraft financing for 30 years — including stints with Piper Acceptance Corporation and Chase Aircraft Finance. "Nobody had done this before."

Harvell's company can finance up to 75 percent of the total kit invoice and will do it in three stages. A five-year loan on the initial stage might cover the kit from the firewall back, he explained. When the engine and avionics are added, the new balance can be combined into another five-year loan. "When you have a completed airplane flying, then you have collateral. Then we'll finance the airplane for 10 years."

On kit loans, Nafco looks at the individual's credit history and total debt load, which cannot exceed 40 percent of his gross income. And the project must be insured. Avemco offers a policy for homebuilders that protects the builder and lender — and also covers the builder's labor in the event of a loss. "If they can pass those hurdles, we can put a deal together — and most of them do," Harvell said.

Ten-year financing for a production aircraft requires a down payment of 10 to 20 percent, depending on the applicant's credit history and the aircraft's condition (has the engine just been overhauled, or will one be required soon?). "We can go 15 years if they want, but we don't recommend it," Harvell added. "That goes for an experimental, too, if it's built and flying. We treat them the same."

Harvell seconded Walker's suggestions about preparing as complete an application package as possible and supporting it with verifiable information like tax returns. Harvell requires a spec list and pictures of the airplane.

When conducting a title search for liens against aircraft, particularly older airplanes, Harvell said pilots should always ask for notations. Notations can lead to the discovery of liens, bills of sale, or other documents that were filed with the FAA but never recorded. "That clouds the title," he explained. "One of those could become active, like a volcano. Banks are often quick to file a lien but slow to release one. Coming up with clean titles is becoming one of our biggest problems."

Above all, said Harvell, don't be disappointed if a lender turns down your aircraft loan application. "Each lender has his own situations that are 'hot buttons.' Maybe the lender doesn't feel that that particular airplane fits that individual's mission profile. Don't be discouraged; you may be compatible with the next lender."

Buying Experience

Second mortgage pays for Piper

Things happened "blindingly fast" when Andrew Niemyer and his wife of Bismarck, North Dakota, bought their first airplane last December. Considering the market prices of the fixed-gear, 1980-or-newer six-place singles they had identified as filling their mission requirements, the Niemyers planned to start shopping in three-and- a-half to five years — until they heard of a particularly nice Piper Comanche available locally.

Because the 1963 PA-24-250 had always been hangared, its original paint and interior were both in pretty good shape. The Comanche had its original fuel-injected Lycoming IO-540 engine (an option in 1963), an autopilot, a Tanis engine heater, and several modifications designed to increase cruise speed. "The price was way lower than what my wife and I were planning to spend," said Niemyer, a U.S. Navy Reserve commander selected for promotion to captain, and president of the North Dakota Pilots Association. "We were willing to trade two seats for the lower price and higher speed." The Comanche cruises at 155 to 160 knots, more than 20 knots faster than the fixed-gear single originally sought.

Niemyer initially was concerned about the airplane's laminar- flow wing design. "I knew this was going to be a slick airplane, but it was love at first flight. I was particularly impressed with its low-speed characteristics."

Soon he was simultaneously obtaining insurance and loan quotes. On their accountant's recommendation the Niemyers set up a limited liability partnership (LLP) to own the airplane. Instituted in North Dakota a year ago, Niemyer said, an LLP offers the liability protection of a corporation without "going through the hoops" of incorporating.

And although they initially worked with a major aircraft financier, the Niemyers ultimately paid 80 percent of the purchase price from a second mortgage on their home. The interest rate was slightly higher than that on the bank loan, but the mortgage will be less expensive because the interest paid can be deducted from income taxes. "It's an option people should consider when financing an aircraft purchase," he said.

After a careful prepurchase inspection by a respected mechanic who had maintained the airplane for a previous owner, the deal was completed. Total time from tip to ownership was six weeks.

"I was apprehensive about moving so fast," Niemyer said. "What made it pleasant was that everything was local. That was one of the things that helped us make the decision to purchase it." — MPC

Title and Escrow

How to avoid nasty surprises

You hardly ever need to conduct a title search — or have to place your money in escrow — to buy a used car, so why enlist those services when buying a used airplane? Basically, they offer peace of mind. Title searches may even be required by a lender. First, let's look at the title search which is aimed at discovering liens.

Liens are legal claims against the aircraft and can be brought by individuals, maintenance shops, banks, and other parties. A lien may result from an easily corrected administrative error or it may be real, potentially making you liable for debts of hundreds or thousands of dollars. In either case, you don't need bad news like that after the purchase has been completed. A title search assures that you are, in fact, buying from the owner listed on FAA records (it may actually be a bank instead of the person you've been talking to) and that there are no undisclosed financial claims against the aircraft (or more correctly, no claims relating to the aircraft against any of its previous owners).

Can you just call the FAA and ask them to do a title search? No. If you did, the FAA would refer you to a title search company. There are approximately 20 companies in the title and escrow business — all of them in Oklahoma City, where FAA records are kept. Among them is the AOPA Aircraft Title and Escrow Service, headed by Ann Lennon.

It is possible to complete an airplane sale without a title search, but it isn't wise. Lennon recalls the experience of three doctors and a $125,000 Piper Aerostar. The first doctor sold it to a second, who did no title search. The buyer had no way of knowing that the seller had deposited the money from the sale into an interest-bearing account, rather than paying off the loan he had on the Aerostar. The buyer kept the aircraft a few years and decided to sell it to a third doctor, who did a title search and discovered the lien. The result was a delayed sale: The first doctor was required to pay off the loan.

Other companies report similar experiences. Insured Aircraft Title Service President Mary Miller once found an aircraft that had two liens against it but no debt. The liens just had not been removed. It was a simple matter to eliminate the liens, and doing so contributed greatly to the peace of mind of the new owner.

So it seems that a title search is a commonsense thing to do, but what about escrow service? Can you skip that?

Yes, but once again, escrow service is inexpensive protection. An escrow service is an impartial third party that holds the money until the buyer and seller are satisfied with the deal. Here's how it works:

Let's say a lien against the aircraft you are about to purchase is discovered. The escrow holder will pay all lienholders out of the purchase funds you have provided and then give the remainder to the seller. Without an escrow holder, you might pay for the aircraft and find out later that you owe a lienholder as well.

Lennon recalls one deal that benefited greatly from AOPA's escrow service. The title search showed an endless list of problems: unresolved court documents, leases, liens, and other paperwork that required clarification. Having the money held in escrow provided an easy way to put the deal on hold until all issues could be resolved.

There are other benefits, as well. Escrow service is especially valuable if the parties are separated by great distances, such as a seller in California and a buyer in New York. The escrow company serves as a central point from which all parties can track the sale.

Miller said that in the 1980s there were several cases of aircraft's being sold to two parties. The unscrupulous sellers were keeping the money from both. Buyers who placed their money in escrow simply reclaimed it upon learning of the second purchaser.

Only eight of the 20 title search companies in Oklahoma City offer escrow service. Escrow fees are higher than those for title searches and vary with the price of the aircraft. Typical escrow fees range from $150 for the smallest aircraft to $10,000 for a top-of- the-line corporate jet.

While title and escrow services add to the cost of purchasing an aircraft, they help to avoid problems that are much more costly, not only in dollars but also in inconvenience. — Alton K. Marsh