Guide to Yacht Purchases
The purchase of a pleasure yacht represents for most people a substantial investment, similar to the purchase of a house. Unlike a car or other machine, a vessel may last for decades. Options to repower and upgrade electronics make the fiberglass boat an item of indefinite duration with older, classic styles often preferred to shiny new models. A pleasure yacht often becomes a very personal, "living thing" with memories attached to it. Yachts, because of their high cost and their mobility , are also subject to many laws and regulations which the purchaser may not be aware of.
There is no simple checklist of things to do and avoid in the purchase of a yacht. The intended use of the boat and the financial circumstances of the buyer are the main guidelines but many variables will still be involved. As in everything else, planning is very important. Unfortunately, however, the excitement of a new toy and the sales pressure of brokers often prevents a buyer from a careful analysis of the options. The following is only a general guideline of the various steps involved before and after the purchase of a yacht. For specific advice, it is recommended that a purchaser consult an attorney and an accountant familiar with yacht ownership.
The first thing a potential yacht owner should do is to decide the type and size of boat he can afford and will be comfortable with. While this concept may seem obvious, it actually cannot be stressed enough. The choice of boat should be determined by the specific needs and intended use (racing, casual cruising, extended cruising, investment, charter, tax shelter, second home, liveaboard, etc.). The prospective purchaser should know exactly what he wants to do with the vessel he is purchasing. Not only is a certain type of yacht unsuitable for certain uses but the legal, financial, insurance and other requirements may be different. Certain yachts are difficult or impossible to insure as are certain skippers without experience or with negative information on their records. Certain vessels may not be insured for certain voyages. If co-ownership is considered, the time to plan for it is before purchasing the yacht.
A sales contract is not a step to be bypassed, particularly where the yacht is an expensive one. Many things must be covered in a sales agreement. Among the various issues, you must make sure that you have the right to get the boat surveyed. If purchasing an old boat you may decide to accept certain defects and not others. A clause for post survey negotiations should be included. You should know exactly which equipment is included. You may want to make the sale subject to financing. In some cases, when selling one boat and buying another you may want to make the purchase subject to the sale of your other boat. Other items to be covered in a contract are the hull or identification number; place of delivery of the boat; terms of payment; liability for loss before and after delivery.
Financing the boat has consequences that go well beyond the avoidance of cash outlays. Tax laws allow for the deduction of interest on certain loans. In many cases, interest on a loan on a yacht that can be used as a second home (or first home for that matter) may be tax deductible. Again, certain boats qualify as "second homes" while others, usually very small ones, do not. Financing a boat also means complying with the many requirements of a lender. For example, a lender may require that a yacht be kept at a marina and be covered by hull insurance. But someone with a free mooring contemplating the purchase of an old boat may not be interested in complying with the requirements of a lender if such requirements would make yacht maintenance unreasonably expensive. For a more detailed discussion of ship mortgages, please refer to the chapter on the purchase and sale of vessels.
United States law offers two types of vessel identification: registration and documentation. The difference between state registration and Coast Guard documentation is meaningful only for certain uses of a yacht. Federal documentation makes sense for those traveling overseas and in international waters because it carries more weight than state registration. It also simplifies matters for those who use the boat in two or more different states for several months at the time. Insurance carriers often require documentation for large yachts. Federal documentation, however, does not relieve the owner of the sales tax liability in the state where the yacht is used. The procedure to document a vessel, although recently streamlined, still presents much more paperwork than state registration. Companies and attorneys who provide that service charge several hundreds dollars.
Vessel insurance refers to two types of coverage: hull and indemnity. In other words, one covers the value of the yacht and the other the liability of the owner. The difference between "boat insurance" and "yacht insurance" is that in yacht insurance you get what is known as "agreed value". In case of loss, no depreciation is taken. Virtually all new vessels carry insurance while many older boats do not. As some skippers put it, "it's a better investment to put the premium money in an extra anchor". Insurance options are almost unlimited. Certain boats are uninsurable as are certain blue water passages or certain destinations. In the end, where the purchaser obtains free title to a yacht, it will be his call to determine what type of insurance, if any, is appropriate.
Most insurance companies require a survey. A survey is also a good way to locate potential problems. Not all surveyors are alike, however. Check the references of the marine surveyor, such as accreditation by SAMS or other organizations. One thing to keep in mind is that accreditation by a surveyors' organization does not provide any guarantees. In the event of mistakes by a surveyor which lead to the purchase of a defective vessel, the only real comfort will be an error and omissions policy covering the surveyor. Also, remember that surveyors have specialties such as rigging, fiberglass hulls, aluminum hulls, power or sail, etc.
If the plan is to charter out the yacht, appropriate arrangements should be made and a business plan should be prepared. Most charter companies, for example, do not take older or small boats into their fleets. This information should be on hand before a yacht is purchased. The financial and tax consequences of placing a yacht into charter service can also be significant. An accountant should be retained prior to making a final decision.
As in the case of a charter, sharing the yacht is a decision which will seriously affect the use of the yacht. Along with the sharing of expenses, a sharing arrangement also calls for the assignment of rights and duties of the co-owners. Finding a partner for the ownership of a yacht is akin to finding a roommate. There is no substitute for the search of a compatible person with a compatible schedule and needs. But certain rules should be in writing in the form a co-ownership agreement. The agreement should spell out how and where the yacht is to be kept and used, how it will be financed and insured, who will provide the maintenance, who and when will use it, a conflict resolution clause and other items.
The purchase of a used yacht presents a complication which is not encountered in real estate and automobile acquisitions. In addition to the regular liens of record such as mortgages, vessels are subject to maritime liens, also known as hidden liens. A person who has performed work on the yacht or provided services or supplies to it may have a claim against the vessel itself and therefore a lien. The owner of a lien on the vessel can bring a proceeding against the vessel itself (known as in rem proceeding because it is against the vessel) and cause the vessel to be sold by a federal Marshall. Some liens may be registered with the county clerk or other local authority where the vessel has been registered or used, but that is not always the case. Yachts can move and incur liability in areas that are very far from the point of sale. There is no certain way to identify all possible liens and the history of the vessel is usually the best way to establish clear title.
