How Does The Escrow Process Work In Aircraft Sales?
If you've ever purchased a home, you're already familiar with the escrow process for real estate. The whole point of escrow is to have an independent, trusted third party oversee your transaction. Escrow in aircraft sales works similarly to real estate transitions.
As an aircraft buyer, it's highly recommended that you hire someone to handle escrow for you because it is a full-time job. This way, you don't need to worry too much about the paperwork, state and federal filings (FAA), and disbursement of funds.
You may think this doesn't sound too difficult, and you should be able to handle escrow on your own. But when we say full-time job, we mean it!
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Breaking Down The Process Of Escrow In Aviation Sales
Yes, the process is simple enough to understand. However, much more goes into the entire transaction than you might think. When it comes to escrow, the true challenging work is in the details, which is why you should hire someone to handle it for you.
Understand Each Step Of Purchasing An Aircraft
As mentioned earlier, escrow in aviation is very similar to escrow in real estate. As the buyer of an aircraft, you will want to take 3 immediate actions:
1. Contact An Escrow Company
As soon as you have all your financial affairs in order, start by contacting an escrow company to get your transaction moving.
2. Establish Your Account
In some cases, you can open an escrow account for free. Once you wire the money to the escrow company, they sit on the funds and take their fee, and they will sit on your money until you purchase the aircraft.
3. Order A Lien & Title Search
Many people don't realize that the due diligence phase should include a lien and title search. You can lien an engine, prop and airframe for a piston aircraft. For a business jet, you'll want to run a lien search on all of the engines, including the APU, if it has one installed.
In fact, many buyers aren't aware that you can lien a prop, or even an engine, for example. All liens must be cleared before buying an aircraft. Otherwise, the seller is selling the debt with the airplane, which opens you up to a lawsuit.
So, before you close, ensure there are no liens or encumbrances on that asset. If there are, then the seller or owner of that aircraft should clear those liens, and doing so would be a prerequisite to closing.
Find Someone To Handle Escrow For You & Your Aircraft
Because an aircraft, in its nature, can move the whole closing process in terms of jurisdiction, it obviously revolves around where in the world it's going to close. Each state in the United States has its own sales tax structure, which an escrow officer will help you manage. So depending on where you're closing, there's going to be a bunch of other things that you have to deal with in terms of taxation.
Generally speaking, most buyers use one of the many escrow companies based in Oklahoma City. Why Oklahoma City? This is where the Federal Aviation Agency (FAA) is. It's different from escrow in real estate, which is usually a law firm or a title company. Instead, escrow in aviation offers the significant advantage of having someone physically present at the FAA – giving them real-time access to filings. Because you have to have somebody there full-time, hiring an escrow company is best.
Yes, you can escrow in other ways. In fact, some manufacturers don't use any of the Oklahoma City-based escrow companies and insist on using a law firm. You can also go with non-Oklahoma City-based escrow companies. The main objective of escrow is to have someone with the know-how and experience to handle your aviation transaction.
Closing On Your Aircraft
Instead of going the old-fashioned route of mailing the FAA and waiting, an escrow officer remains on top of policing the transaction, collecting all documentation, getting all necessary documents stamped and filed with the FAA, and closing out the transaction.
The buyer, seller, and the FAA all get a file at closing, in which there may be a closing call or email asking for each party's authorization in the sale. After approval, both the money and asset transfer to their respective parties.
Why Is Escrow In Aircraft Sales Important To Understand?
It all comes down to money – your money, to be exact. An escrow company not only sits on your money, but they also get a copy of the purchase agreement and the letter of intent (LOI).
As they track each step of the process, they will give you a punch list of all required documentation. It will include the Bill of Sale, registration, deregistration for foreign aircraft, and other essential documents.
Furthermore, when most people sell an aircraft, they're selling the registration with the aircraft. So, there will usually be a transfer of registration, which is another reason why you want to hire an escrow company, as they can have it stamped in real-time by the FAA at closing. There's no mailing and waiting, which is crucial if you want to fly the aircraft immediately upon closing.
Potential Problems To Be On The Lookout For When In Escrow For Your Aircraft
There are possible disputes that can reveal themselves during the purchasing process. A few of those problems can be:
Disagreement between parties
Withdrawal of purchase, default
Having an escrow company involved means having an independent, unbiased, and neutral entity to police the transaction. They also decide whether or not they will hold funds or lock them up in case of a dispute or investigation. They are there to protect the parties. And so, if there is a dispute between the parties, an escrow officer gets involved in preventing the disbursement of funds. This means the buyer can't take the funds back, and the seller isn't entitled to them until there's some workout amongst the group.
When dealing with aviation transactions in the thousands to millions of dollars, lawsuits are possible. Having an escrow firm protects you from many potential legal issues in your transaction.
It is essential to know that escrow does not involve issues relating to the airworthiness or financing of the aircraft. They will make the bank a party to the transaction, especially if there's going to be a release of the lien holder or if there's financing involved. Because, in this case, the funds are coming from somebody else. So if the aircraft is being financed, just like in real estate, the bank will have to position the loan with escrow before closing, which brings a high level of comfort to the bank involved. Some banks will mandate an aircraft purchase goes through escrow depending on the transaction amount.
What You Should Know About The Entire Aircraft-Buying Process
Yes, you are paying someone else to handle escrow for you. But by doing so, you can mitigate risk during the transfer of ownership using their expertise in their field. It's worth the fee you will pay to not only protect yourself legally but also have the following:
Physical presence at the FAA
Professional with experience and knowledge of aviation purchases
Unbiased experts with your funds under their care
Protect Your Assets & Hire An Escrow Professional With Experience In Aviation
If you don't have the time or expertise required to handle your aviation purchase alone, hire an escrow company to handle your transaction for you. They can oversee the process, keep all documents organized and handy, and protect you from potential liabilities.
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