by Thomas Suchy, Esq.
Once you find the boat you are looking for, the process of completing the purchase can seem somewhat daunting to many as it generally involves entering into a “contractual” relationship. The “offer to purchase” is the first step and is essentially an offer to enter into a contract to purchase the boat for a particular amount. Several other “contingencies” can be added, and often are, in addition to the price. These will almost always include a satisfactory sea trial, a satisfactory survey of the engine and hull, as well as any others which the purchaser desires. It may be transfer of the existing slip, obtaining approval for financing, etc. Often, with an out-of-state buyer, they may make an offer “contingent” on inspecting the boat.
What is a contingency? It’s nothing more than another factor, like price, that the purchaser requires before “agreeing” to buy the boat. In other words, “Buyer” makes an offer to “Seller” that I will pay you $50,000 for the boat (the first contingency) subject to satisfactory sea trial (2nd contingency), a satisfactory survey (3rd contingency), that the current slip is transferrable (4th contingency), that he is able to obtain satisfactory financing (5th contingency).
Generally an offer will have a period of time allowing the seller to respond. Three days is not unusual but it can be more or less…up to the buyer. Once the offer is presented to the seller, he then has that period of time to respond. The response may agree to all the contingencies and if he does, the parties have now entered into a “contract” to buy/sell the boat based upon those terms. Alternatively, the seller may not agree to the price, perhaps he was asking $60,000. The sea trial and survey contingencies are generally designed to favor the buyer and are not something a seller is in a position to deny…if he were to say no to a sea trial and survey, it’s likely the buyer should find another boat! Other contingencies such as transfer of a slip may not be agreeable if the seller is planning on getting another boat and using that slip so he may say “no” to this request.
So let’s say the buyer doesn’t agree to $50,000, but will accept $55,000 and he doesn’t want to give up the slip because he has a new boat on order and wants to use the same slip. He would then, thru the broker, prepare a “counter offer” or counter proposal offering to sell the boat for $55,000 and that the slip is not available. The counter offer will also have a time in which it expires, perhaps 2 to 3 days. In addition to the time allowed to respond to the offer or counter offer, there should also be a time set forth for all contingencies to be completed and for the deal to “close.” Typically, this may be 10 to 15 days. The seller usually wants the shortest time so he can get his money and the buyer usually is also agreeable to a short time so he can get his boat and have fun. It is important to be mindful that adequate time needs to be included to allow for all the contingencies to be completed, including hiring of a marine surveyor and scheduling of a haul-out at the local boat yard. In spring and early summer both can be very busy resulting in some delay. Often the seller is agreeable to extending these time limits but doesn’t have to, especially if there is someone who is now willing to pay him more money. This could give him a way out of the original agreement.
If the buyer is willing to pay $55,000 and has found another slip, he can agree to these terms, in writing, and, once again, the parties have a “contract.” Normally a broker will obtain a deposit to show the buyer’s “good faith” at the time the offer is made. Generally this amount is 10% of the offered amount. Once there is a contract agreed upon, this deposit should be placed in the broker’s trust account where it will be held pending completion of the agreement.
The sea trial and survey contingencies, as mentioned above, are designed to be to the benefit of the buyer. Both of these are to his satisfaction, meaning that if he doesn’t like the way the boat performs at sea trial, then he can say he is “not satisfied” and would be entitled to terminate the agreement because this contingency of a “satisfactory” sea trial was not met. Similarly, if the survey, either of the hull or engine(s) was not to his “satisfaction,” he could also terminate the agreement. Terminating the agreement due to failure to meet one or more of these contingencies generally means the buyer would receive his deposit back. Once these conditions are found acceptable, any other contingencies need to be addressed and upon completion, the parties are ready to “close” the deal and complete the transaction. In the event any part of the purchase is being financed thru a lender, the actual closing may take a bit more time as the funds have to be transferred to the broker and then dispersed to the parties.
At the time of closing, and in the closing statement, the initial deposit held by the broker is addressed. The holding of these funds by the broker during the completion of the various sea trial, survey, and other contingencies is primarily designed to protect the seller. For example, if the buyer hires a marine surveyor who discovers early in the process that there are significant defects, the buyer may decide to immediately terminate the agreement but he may not have paid the surveyor for his work. The surveyor could file a lien on the boat thus damaging the seller’s title and making it impossible to sell. Similarly, the buyer may have arranged for the boat to be hauled out at a local boat yard as part of the survey. Once out of the water, the defect causing the buyer to abandon the deal is found and the boat yard has not yet been paid so they refuse to put the boat back in water until the bill is paid. Under these circumstances, the deposit monies could and should be used to pay either the surveyor or yard as these expenses are always the responsibility of the buyer and the contract will nearly always specifically so state.
It is important to keep in mind that the purchase of a boat, like anything else of significant value, is a process involving contracts and certain legalities. Hopefully, this will ease the anxiety of the process somewhat. There is no reason you should be intimidated by these legalities but rather recognize them and how they are designed to make the process move smoothly and to provide protection to all parties.
Thomas Suchy, in addition to being a licensed Yacht & Ship Salesperson in the State of California, is also a licensed attorney in both California and Michigan. This article is not meant to be an exhaustive discussion of all the contractual aspects of a purchase agreement but rather is meant to offer a useful understanding of the process. Any specific legal questions or issues should be directed to a licensed attorney for consideration.