Allowance During Boat Purchase

[Certeza]

Allowances are very common in real estate for allowing the buyer to include future rehab in a primary mortgage.

Are allowances for things like engine rebuild, re-upholstery, etc common during negotiation for boat purchase?

[Celestialsailor]

Well...I think it's more like buying a used car than the comparison to Real estate. Lets say its a 35 foot sailboat. The engine has 7000 hours on it and the rigging is 12 years old. The electronics are from 1980...on and on. If he is selling it as a turnkey cruiser, you can deducted those sort of things.
The very best thing to do is get a surveyor...a good one. He should be able to see what they currently sell for, what short-comings the vessel in question has and what it is worth in it's current condition.

[jkindredpdx]

I agree CS but... When offering less than asking price for Sedna, I listed some hull scratches, teak splinters, and suspect magnetron as justification. I came up with 2X dollar repairs for the desired allowance so that I was splitting the expense with the seller.

One of these days I'll get around to making those repairs.


JimK

[Certeza]

Thanks for the input guys. I guess my curiosity has less to do with getting a reduced price and more to do with financing. I'm asking more along the lines of approx $500k purchase price.

So let's say I was gonna do $50k in refit work. An allowance would allow me to establish a current value of $450k with the seller but a sales price of $500k with the lender.

Financially in my situation it makes more sense to do $100k down on a $500k boat and finance the rest. As opposed to doing $90k down on a $450k boat and another $50k out of pocket for refit.

Opportunity cost on the extra $40k is significantly higher for me than the relatively low rate on the loan. Would be nice if I could work something like that out.

[Ex-Calif]

My purchase went in 4 phases.

1 - Make an offer based on pre-survey inspection and what was advertised.
2 - Execute a purchase agreement which included downpayment, survey access and remedies for items discovered on survey. It also specified the conditions for the sale not to proceed and what would happen to the downpayment.
3 - Survey and negotiation of items discovered.
4 - Sale completed

No agreement is perfect but I attach ours as a reference.

[Certeza]

Thanks Ex-calif...

That gives me a good idea of how I wanna set it up if I can. The concept of an allowance is really just money set aside for intended refit. Whether the work is done prior to sell and I pay full price, or done after and I get a discount to make up for it really doesn't matter.

Sounds like it is just a contractual issue.

[Ex-Calif]

Originally Posted by Certeza

Thanks Ex-calif...

That gives me a good idea of how I wanna set it up if I can. The concept of an allowance is really just money set aside for intended refit. Whether the work is done prior to sell and I pay full price, or done after and I get a discount to make up for it really doesn't matter.

Sounds like it is just a contractual issue.

Where you get into trouble is when you are financing and the purchase price is inflated to cover refit items via a kickback from the seller. Finance companies look poorly upon that.

Not saying it doesn't happen. Not saying I've done it -

[ksanders]

Boat purchases don't generally work that way unless the survey is significantly higher than the purchase price.

Then you might with some lenders borrow on the boat up to some percentage of the survey price, and if that leaves you money for refit...

I bought a boat needing a major refit and repower.

It was cash out of pocket for my boat.

[Certeza]

Originally Posted by Ex-Calif

Where you get into trouble is when you are financing and the purchase price is inflated to cover refit items via a kickback from the seller. Finance companies look poorly upon that.

Not saying it doesn't happen. Not saying I've done it -

Yeah, I hadn't really intended on trying to get an inflated appraisal. IMO, for boats and real estate, appraisals are what they are. The negotiated purchase price should have nothing to do with it. Lenders should use appraisers that they trust and then maintain a lending policy based on a down payment on the appraised value.

But I digress.

[skipmac]

In my experience as a former yacht broker no this isn't common. In fact I don't recall a specific instance of this.

I believe it will all come down to the company financing the purchase and your credit limits. In general boat loans are based less on the value of the boat than the credit worthiness of the buyer. I would just explain to the lender your idea, show survey or other documentation on the items that need repair and upgrade, and estimates to do the work and ask if they will lend the amount you want.

If you're sitting with a few million in liquid assets to show the bank I imagine they won't mind lending several thousand over the actual purchase price.

[Cheechako]

I think on boats there are not allowances, but once the survey takes place, you can renegotiate. You have a lot of leverage at that point because the boat problems will be "known" somewhat in the buying selling community afterwards.
Make your offer based on what you see.
I think maybe you want to get financed money to help rebuild the boat? I'm no expert but I seem to recall more reluctance for some reason for allowances by lenders on real estate now also? They view it as kickbacks now that the world has changed... anyone else see this?

[thinwater]

I have seen this done, by agreement with the bank, just like real estate. I have also seen all of the closing and survey costs rolled into the finance. It just depends on your relationship with the lender. I don't think the contract or seller was involved.

The important thing is that you have other security and that the boat is not too old. No project boats, only good boats that are being brought back to pristine. The Surveyor may be able to help by coupling your refit list with his list of corrections (the list should be split into safety and nice-to-have).

[Certeza]

Originally Posted by thinwater

I have seen this done, by agreement with the bank, just like real estate. I have also seen all of the closing and survey costs rolled into the finance. It just depends on your relationship with the lender. I don't think the contract or seller was involved.

The important thing is that you have other security and that the boat is not too old. No project boats, only good boats that are being brought back to pristine. The Surveyor may be able to help by coupling your refit list with his list of corrections (the list should be split into safety and nice-to-have).

Exactly. That's why I was questioning it. In the real estate world, this is a bank issue. The sales price simply is what it is. What we are discussing is simply the LTV ratio. In real estate, the allowance is simply capital held in escrow for payment of certain rehab items. The buyer cannot conveniently "forget" or drag his feet. Until the work is completed, the money isn't released from escrow. It simply saves the owner from carrying a 2nd mortgage at a higher rate and paying double the closing costs. Obviously, not all lenders do this.

Also, Cheechako was correct in that things changed a bit after the housing crash. It used to be that almost every lender based the LTV on the appraisal. Now there are a large portion who simply base the LTV on the purchase price. I recently completed construction on a large custom home with a realistic fair market value that was about $100k higher than the build cost. I did the project as a favor and didn't really charge much for it. Even still, the lender that the owners chose wouldn't finance more than 80% of the build cost, regardless of appraised value from their own appraiser. In the end, the owners had to switch bank for the permanent loan because of the difference. All other banks viewed it as a move-in ready new home and would loan 80% of appraisal with no insurance. But the bank that carried the construction loan knew the build cost and wouldn't loan more than 80% of that, which was effectively 62% of appraised value.

Ironically, as the builder, I could've charged the $100K as a contractor fee and the original bank would've authorized it and then loaned 80% of the higher amount. The problem there was that the $100K would've been taxable at 39.6%.

[hellosailor]

No one mentions where this transaction is supposed to take place but in the US, even if it was legal for a lender to lend more than the sale price of the goods (and this is goods, not real property) the lender would have to be totally stark raving mad to make a loan for MORE than the value of the goods with NO OTHER COLLATERAL to insure the loan.

Not that lenders haven't done these things before, even with home mortgages, but some of them have recently made billion dollar settlements with the feds about this kind of behavior.

If anything, you want a higher percentage for the down payment these days, and they'll want to see the paperwork proving it was paid.

[Certeza]

Originally Posted by hellosailor

No one mentions where this transaction is supposed to take place but in the US, even if it was legal for a lender to lend more than the sale price of the goods (and this is goods, not real property) the lender would have to be totally stark raving mad to make a loan for MORE than the value of the goods with NO OTHER COLLATERAL to insure the loan.

Not that lenders haven't done these things before, even with home mortgages, but some of them have recently made billion dollar settlements with the feds about this kind of behavior.

If anything, you want a higher percentage for the down payment these days, and they'll want to see the paperwork proving it was paid.

I see your point, but disagree on the stark raving mad part. Have you ever wondered why the lowest rates are for auto loans? Rates are supposed to be reflective of loan risk, but I can get an auto loan for 2.8% and must pay 4.5% on a home. It seems odd until you realize that during the financial crisis, banks found out that people would stop paying their mortgage before they stopped paying their car payment. These days banks are absolutely willing to lend more than the market value of a car and they know full well that a large number of the auto loans are underwater.

Obviously boats are different than cars, but the point is that there are no laws saying that a bank cannot loan more than a vehicle is worth. They can make completely unsecured loans if they want to. Example: Suppose you own a car worth $5K trade-in, but still owe the bank $8K. Take that car to a dealer and trade it for a $20K car. They are going to roll the old loan into the new one and line up financing for you for $23K on a car that is only worth $20K. They'll probably even include the sales tax if you want them to. Unsecured debt is neither illegal nor imprudent, as long as they manage the risk appropriately.

Anyway, that isn't what we are talking about here. No one is suggesting a loan greater than the value of the boat. We are still talking about at least a 20% down payment. I'm just saying that I'd prefer 20% of the post-refit value of the boat rather than the pre-refit value.