When a buyer elects to finance their aircraft, most lenders require an aircraft appraisal. Lenders will require one of two types of aircraft appraisals: 1) a desktop aircraft appraisal or 2) a physical appraisal of the aircraft.
A desktop, or remote, aircraft appraisal is based on certain aircraft information which is sent to the aircraft appraiser and the aircraft appraiser completes the appraisal based on the information received. The information usually needed to complete the desktop aircraft appraisal includes: a recent computerized aircraft maintenance report showing upcoming inspections and any past due items; aircraft make, model, and serial number; the aircraft configuration; and an aircraft specification, including current times on the airframe, engines and APU. The aircraft appraiser will also need to know if the aircraft is currently on any airframe, engine or other maintenance programs. Appraisers will also use market considerations and analyses in the appraisal.
A physical, or on-site, appraisal of the aircraft occurs when the aircraft appraiser travels to the aircraft and conducts a review of the aircraft and its records for the appraisal. In the case of a physical appraisal, the aircraft appraiser will still need all the information listed above but most of it will be with the aircraft or in the aircraft records that they review in person. It is important to make sure the aircraft and records are at the same location when the physical appraisal is conducted on the aircraft.
Typically, lenders will not order the required aircraft appraisal until the aircraft purchase agreement is signed. In some cases, lenders will wait until their underwriting group has approved the loan to order the aircraft appraisal. However, the timing of the aircraft appraisal could delay the aircraft purchase process or, at the very least, cause some unexpected out of pocket expenses for the buyer.
A financing contingency is a provision in a purchase agreement that typically states a buyer has a certain amount of time after execution of the purchase agreement to obtain financing for the purchase – and if the buyer does not, then the purchase agreement can be terminated. Financing contingencies are relatively uncommon in today’s market. But, if the buyer has already signed a purchase agreement that does not have a financing contingency, then the buyer has a risk that the appraised value will come back lower than expected and result in the lender financing a lesser amount. In some cases, if the appraised value comes back too low it could impact the loan approval and leave the buyer in a bind.
As a result of the possible impact appraisals may have on the purchase process and timeline, it is important to understand when the appraisal will occur. In some instances, especially where financing is needed for the buyer to close the transaction, the buyer should consider requesting the appraisal be ordered by the lender early in the process, even if it means additional costs to buyer if the closing does not occur. Alternatively, working with the seller and being transparent with the lender’s requirements may allow flexibility to be built into the purchase agreement timeline to limit the possible financial impacts to buyer with regard to the timing of the appraisal and/or the results of the appraisal.