Guide to Trading in Your Boat
Trading In Your Boat – Let’s Remove the Mystery and Emotion
In general, the market for boats is not expanding as rapidly as manufactures are building boats. This simple fact means the majority of boat buyers are already boat owners. Most boat owners looking to move up or down would rather not be faced with the prospect of owning two boats. In most cases they don’t want to wait for their existing boat to sell before committing to the next. These factors lead to the discussion of a trade.
Used Boat for Another Used Boat
Before diving too deep into the discussion of values, it should be noted that some situations do not lend themselves to trades. Dealer owned trade boats aside, top on the list is brokerage (used) boats listed by the dealer. Its very rare that interest align in such a way that an individual selling a used boat is interested in taking another boat on trade.
Existing Loan Exceeds Market Value
Another factor is a boat loan that exceeds the market value. In most cases this requires the owner to close out the loan prior to completing the transaction. Also, boats who’s values equal or exceed the value of new boat. The last thing most dealers want to do is pay money to complete the transaction.
Lastly, location can be a determining factor. A boat that geographically is difficult to maintain and show can negatively impact a dealer’s desire to enter into a trade.
Types of Trades
On the dealer side of the equation a trade simply represents delaying revenue and profit of the original transaction and assigns additional risk to the dealer in the form of having to sell a second boat. In our office we refer to that total revenue and profit as the deal’s “bag of money”. The objective in the end is to have the same amount of money in the bag with or without the trade. Understanding this, the deal can look one of three ways depending on the psychology of the buyer.
1. A fair deal on the new boat and a fair deal on the trade.
2. A great deal on the new boat, but less value towards the trade.
3. No deal or inflated price on the new boat, and inflated value on the trade boat.
Scenarios one and two are best for both parties. Scenario three can ultimately result in the buyer being upside down on the future value of their new boat. Also, depending on the State where the transaction occurs, regulations can mandate minimum trade values. Dealers are required to provide proof of the value of the trade in the form of a percent of an actual survey valuation or data base such as NADA. The States’ motivations are tax collection and consumer protection.
Before a deal can get to the point of ordering up surveys to confirm the value, the dealer needs to calculate and provide the buyer with an estimate of the trade. There shouldn’t be any mystery to that process or calculation. The number can be easily explained and justified. All the source data is pulled directly from Yachtworld and Soldboat Data, the two largest and most accurate sources of this information. That raw data should be available to the seller. The table below details the components of a proper trade valuation.
Components of a Proper Trade Valuation
|The boat will have to be listed for sale. The price must fall into the normal range for similar model, year and condition.|
|Sold Price||This is the average price that similar model, year and condition boats have actually sold for within the last 12 - 18 months. The wider the range of sold prices the more difficult it is to fix this number and often dealers will have to error on the low side.|
|Time on Market (TOM)||Looking at the amount of time it took to sell boats and how long available boats have been on the market, and average time on market in months is established.|
|Financial Carrying Cost||This is the cost of money times TOM|
|Storage||This is the cost of storage times TOM|
|Insurance||Monthly insurance premium times TOM|
|Sales Preparation||Estimated costs to make the boat "dealer" ready to sell. May include moving the boat, scheduled maintenance or necessary repairs.|
|Survey||The dealer needs to conduct a survey of the proposed trade boat. In the case of power boats this will also include mechanical inspections. Fees are typically in the $20 to $30 per foot, plus yard fees.|
|Commission||There will have to be commissions paid once the boat is sold. A rate of 8% allows room for co-broker commission.|
|Trade Risk Factor||This is simply a little bit of risk cushion. This rate is dictated by faster turnover and an active market for the make/model. Range from 5% to 10%|
|Trade Value||Estimated Sold Price Less All Other Components|
By using this calculation to establish the value the seller gets a complete open book assessment. While it might not eliminate all the emotions associated with putting a price on your beloved yacht, it does move the discussion into the realm of logic.
When the delivery of a new boat occurs at some future point this provides for an intermediate step in the process. In these cases, the trade value can be considered as a back-stop price and the boat can be marketed through a standard brokerage agreement until closing on the new boat. This provides the seller with the maximum amount of upside value for their boat while still having the protection of the trade value at closing should it be necessary.
Rare is the individual that has not traded in their car. The act is simply an integral part of the car buying process. Dealers reference a couple of data bases and customers acknowledge the less than retail value of their used car. Hopefully by applying the information above it will take some of the mystery and angst out of trading in your boat.
Article by David Malkin