Before You Buy, Get It Appraised!
Not many people would be dumb enough to buy a used airplane without getting a pre-purchase inspection done first. But it's disturbingly common for airplanes to be bought and sold without the benefit of a professional appraisal. An AVweb contributing editor (who happens to be a seasoned appraiser himself) explains why relying on a do-it-yourself aircraft valuation can come back to bite you.
Airplane appraisals are a dime
a dozen, right? There are all kinds of methods of evaluating airplanes from appraisal
software you can purchase, to "blue books" that supposedly give you the latest
prices, to the old throw-the-dart routine. Some of those systems are useful in
establishing a range of value when a buyer is trying to decide if an airplane is worth
pursuing. But a buyer — or a seller for that matter — who doesn't take steps to know for
sure what a particular airplane is worth could be on the wrong side of the financial curve
when the deal is done. I've seen it happen many times.
Airplanes are not like mass-produced automobiles. It is fairly easy to put a price tag on a used car, but airplanes require much more homework. Each plane is unique. You can take two aircraft of the same type with consecutive serial numbers, and because of installed equipment, engine times, damage history, and the type of maintenance they received, there could be thousands and thousands of dollars difference in value. Most buyers and sellers in the used aircraft market place are not qualified to evaluate an airplane properly, and many make very poor decisions.
Ferreting out the real story
A professional airplane appraisal is more than just the value that is written on the last page of the report. It is a comprehensive document that tells a story about the airplane being evaluated. Often the real story is one the seller doesn't want to tell, and sometimes the buyer doesn't want to hear.
For example, a banker called recently and asked me to appraise a Grumman Yankee he wanted to finance for a client of his. The client was a first-time buyer who had seen the airplane and thought it looked good. Cosmetically the airplane did look good. It would have interested anyone who was in the market for that type. But when I studied the logbooks I didn't like what I saw.
First, there was an entry that indicated that some damage was repaired and referred the reader to an FAA Form 337 ("Major Alteration or Repair"). However, there was no FAA Form 337 to be found in the airplane records explaining any damage or repairs to the airfram. The bank was going to do a title search on the airplane, so I asked that their title search company send copies of any FAA 337 forms that were in the FAA file.
Sure enough, the damage to the airplane was recorded. The vertical stabilizer, rear fuselage bulkhead, rudder tip, beacon, windshield and canopy, nose gear torque tube, boot assembly, strut assembly, and propeller had been replaced. There was no indication as to what happened to the airplane. It may have been turned over in a windstorm or involved in a landing accident. The dealer who owned the airplane said he had no idea that it had been damaged at one time. He claimed he never saw the "damage repaired" entry in the airframe logbook when he bought it.
The other major problem with this airplane was that the airframe and engine had 2,056 hours total time. There was no entry in the engine logbook that the Lycoming Oil Pump Impeller AD note had been complied with. (The AD requires the oil pump gears to be changed no later than 2,000 hours.) The airplane was being flown, though technically it was not airworthy because of the oil pump AD note. The dealer said he intended to take care of it soon.
There was a handwritten document in the airplane paperwork that indicated that the airplane's engine had been top overhauled about 300 hours earlier, but there was nothing in the logbook. The piece of paper was not a legal sign off for the work. The engine was run out. The prospective buyer told me later that he was under the impression that the airplane had a 2,400 hour TBO. But the pistons in the Lycoming O-235 engine had not been modified, so it was still a 2,000-hour-TBO engine.
When my evaluation was finished the market value of the airplane turned out to be $6,000 less than the sale price. I did not know the sale price until after I finished my work. Both the banker and his client called to thank me for taking the time to research the damage and for writing a report that saved them from getting involved in an airplane with a questionable past at what would have been too high a price.
Common valuation mistakes
It is not unusual that a good appraiser will dig up information that people don't know about their own airplanes. Many aircraft owners take little interest in their airplanes, don't know how to read the logbooks, and when they made their purchase they took the word of the seller that nothing unusual was hidden in them. They bought the airplane like they would have bought an automobile, after a quick test flight, without consulting any professionals about the condition or value of it.
Using the "blue book" or an on-line pricing service may be helpful in determining a "ball park price," but it's a far cry from getting a professional appraisal. There is much that is emotional about buying and selling an airplane, and most people cannot be objective enough to go through the process the way an appraiser (who has no interest in the airplane) would do.
Sellers invariably tend to overprice their airplanes because they feel they are better than others on the market. They look through the trade journals, find others that seem similar, and price theirs higher, because the one they are selling has a newer paint job, or a recent annual. Many sellers don't understand how upgrading an airplane affects its market value (generally a lot less than they think). Nor do they realize that the price of routine maintenance, such as an annual inspection, cannot be added to the sale price.
Occasionally I'll appraise an airplane for a buyer, and the seller will call because he feels I have valued the airplane too low. The first thing I ask is how he arrived at his price. Most of them go through the same litany of how they looked at other airplanes in Trade-A-Plane or one of the other journals, and then he will list the differences between his airplane and the ones he saw in the other ads.
But when we get into the nitty gritty of his pricing effort, it turns out that not only did he use the "asking" prices that are in the magazines, he also added the cost of a recently-completed top overhaul or the retail value of a new radio stack that he had installed. (I actually had one owner tell me that he added the cost of an in-depth annual inspection that was required to make the airplane airworthy plus the cost of every gallon of avgas that he put into the airplane for the time he owned it!)
Routine maintenance that has been done does not increase the market value of an airplane, because most purchasers expect the airplanes they are buying to be airworthy. So, adding the cost of an extensive annual that was required because the airplane had been neglected or was out of license is an exercise in self-deception. (On the other hand, required maintenance that has not been done will definitely decrease the market value of an airplane.)
Every new piece of equipment you install in an airplane depreciates the moment it's installed. If you install a stack of new radios, for example, the market value of the airplane is likely to increase by only 55 to 65 percent of what the new equipment cost (though the exact impact depends on the type of equipment installed). That's why I always recommend that buyers try to find an airplane that already has the equipment they looking for. It doesn't hurt so much if you have to add one or two items, but you don't want to take the hit for a whole installation.
Cosmetics can play a big role in the value of an airplane, especially when you consider how much it costs to repaint the exterior and refurbish the interior. The industry generally uses the scale from 1 to 10 to describe an airplane's appearance. The problem is that one person's 10 can be someone else's 6!
While searching for a Cessna TR182 recently, I ran into a dealer who claimed his airplane was a "9.5" on the inside and outside. He called it a "low time cream puff" in his literature. When I went to see the airplane, it was not even close! The cosmetics on this 1,700-hour airframe looked like it had a lot more hours than that, though supposedly it had been hangared its entire life. Paint on the leading edges was eroded, and the interior had a bedraggled look. Yet the airplane was priced far above other airplanes that were on the market. I passed on that one.
The importance of objectivity and experience
One difference between the professional appraiser and a buyer or seller who is trying to put a value on an airplane is that the appraiser can be objective because he has no interest in the airplane. A seller has his emotional bias, and a buyer wants to get the whole thing over with so he can have an airplane to fly.
The appraiser will evaluate all aspects of the airplane, not just the paint and interior. A large part of an appraisal is the log book search. An experienced appraiser takes his time going through the airplane records, and reads each entry. The best airplanes have complete, detailed entries in the books, and these take time to read. Those that have stamped entries with no detail tell little about the history of the airplane and the kind of maintenance it received.
The appraiser looks for many things that most pilots would not notice. For example, for each logbook entry that refers to an FAA Form 337, the form should be present. If it isn't it takes time to get it from the FAA. Some you can do without, but anything that involves damage, no matter how minor, must be investigated, especially if there is no detailed description of the damage in the logbooks.
Sometimes mechanics don't make entries in the logbooks when an FAA Form 337 is filled out. If that form is lost or removed from the aircraft records, a buyer may not know about major repairs that were made to the aircraft unless he searches the FAA records for copies of the forms that have been filed. Many pilots and aircraft owners don't know what a 337 form is, or that the FAA Aircraft Registry in Oklahoma City maintains copies of those they receive from local FAA offices.
Damage history and lost logs
The extent of any damage that has occurred to an airplane can directly affect its value. Some types of minor damage, like complete replacement of an aileron due to hangar rash, should result in no deduction. But anything that involves structural damage will result in diminished market value. How much of a deduction is up to the appraiser who is evaluating the airplane, and he or she will base that decision on the type of incident or accident that occurred, the amount of damage, and the quality of the repair.
Lost logbooks can be another source of diminished value, though in most cases, the airplane's history can be recreated and the deduction is minimal. Several years ago I had a call from a fellow who owned a Cherokee 180. The shop that had done his annual inspection lost one of his airplane's airframe logs, and someone on the Internet told the aircraft owner that he had lost 50 percent of the aircraft's value. Both parties agreed to have me appraise the airplane to determine what the diminished value was. I looked at the airplane and discovered that the engine log confirmed the aircraft's total time, and much of its maintenance history. The owner and a mechanic who worked for the FBO attested to the fact that the airplane had never been damaged, and there were no entries in the existing books that indicated any type of damage. The deduction for the lost logbook was just under $1,700. That's what the FBO paid the aircraft owner. A year later, while doing an annual on another airplane, the misplaced logbook was located and returned to the Cherokee's owner.
However, if all the logs are lost, as often happens when an airplane is seized by the authorities or repossessed, and there is no way to reconstruct the aircraft's history, the diminished value will be large. Without logs it is very difficult to determine how much time is on the engine(s), the total time of the airframe, and the age or time on components that have a finite life. Airworthiness Directives may have to be done again, and that could be costly depending on the airplane and the nature of any AD notes that apply.
It is impossible to put an airplane without logbooks on a Part 135 (Air Taxi) certificate unless all the components are overhauled so an accurate history of them can be started. The chronology of the books is important. If there are long periods with no entries, for example, an experienced appraiser will want to know why the airplane was not flown or maintained in an airworthy condition.
Often we find errors in the airframe total time or engine time that no one else had discovered. One seller told me the Cessna 120 he was selling had 1,800 hours on the airframe, but he was wrong. The tachometer read 1861 hours, but the logbooks indicated it had been flown more than 4,000 hours. The owner claimed to have never looked in the books.
Establishing market value
Another very important part of the appraisal is where the benchmark pricing information comes from that the appraiser uses to value the airplane, and how the appraiser uses it. There are many different pricing products on the market; many of them intended for use directly by buyers and sellers rather than professional appraisers. It is very important that such products be used correctly if the resulting value is to be useful, and with some of these products the basic information and formulas that are used are questionable.
Before you buy any aircraft pricing product for your own use, ask the sales representative where the information comes from. If he or she doesn't give you a definitive answer, don't buy it. If someone tells you that the information is based on "aircraft for-sale" values, don't bother with it. That means they are just copying asking prices out of Trade-A-Plane or other trade journals, and those numbers are unrealistically high because they are asking prices, not selling prices.
Some appraisers use the Aircraft Blue Book, but most professional appraisers use the National Aircraft Appraisers Association's extensive aircraft database. It is just as important that the appraiser know and understand the product he is using. There are various methods of assessing the value of damage history, and each appraiser may elect to evaluate it differently.
Picking an appraiser
The author's 220-page book "Purchasing & Evaluating Airplanes" offers an in-depth treatment of this subject.
If you are dealing with a bank that uses a specific appraiser, you probably have no choice in who does the work — though it is likely that the banker has used that person before and is satisfied with the reports that have been received. But if you are searching for an appraiser yourself, ask for references and check them out. Just because someone offers you a business card that says he or she is an aircraft appraiser, that doesn't make it so. It's possible for anyone who has access to a price digest or some type of appraisal software to call themselves appraisers. But if that person does not know how to dig out the important information about the airplane, or how to use the appraisal book or software properly, you are going to pay for a report that is not accurate.
Over the years I have found forged logbooks, damage history that was not recorded, airplanes that were not registered properly or whose ownership was not clear, and countless other problems that have a direct influence on the bottom line of the report. If these problems are not fully investigated and resolved, the purchaser could wind up losing a bundle of money...or even losing the airplane!
Remember that a good aircraft appraisal is much more than the number that is at the bottom of the report. It is a vital part of any aircraft purchase.