Buying equipment from a private seller can yield some bargains. But it can also bring headaches if you’re not careful! Here are a few tips to avoid some common pitfalls.
Consider these scenarios: You are looking through online listings and find a great bargain on a used tractor for sale “by owner” in a neighboring county. You see the skidder you’ve had your eye on parked by the road for sale “by owner.” You are at the local fishing dock and find a GPS unit that specifically meets your needs and is for sale “by owner.” These items are good bargains at the negotiated prices and the sellers seem anxious to close as soon as possible. This seems like an easy and cost-effective way to purchase, so what could be the pitfalls?
- Determine the current ownership of the equipment. The seller must provide evidence of ownership of the equipment. A good option would be the original invoice or bill of sale from when the current owner purchased the equipment. It is likely that for major equipment items purchased from a dealership, the information will be on record with that vendor. If this information is not available, or a seller is unwilling to disclose the information, it is best to not move forward with the transaction. Most people are honest, but don’t assume a private seller always is. Sometimes used equipment hasn’t been fully paid off – or worse, may be stolen.
- How will the sale/purchase transaction be documented? The seller must provide a form of “bill of sale.” This should clearly indicate the full legal name and address of the buyer and the seller/current owner of the equipment. This bill of sale should also clearly indicate the agreed upon sales price. If a seller is unwilling to provide a bill of sale, that’s a red flag and it is best to not move forward with the transaction.
- Are there any liens? The seller should disclose in writing if there are any liens outstanding on the equipment. If there are liens, the amount owed on the equipment should be disclosed. If loan payoffs are required, the seller should provide information on the creditor, the amount(s) due and the manner in which the payoffs will be completed. Unscrupulous (or unaware) sellers may not always disclose outstanding liens, which is where step four comes in.
- Lien search. The next step is to complete a UCC lien search on the seller of the equipment. The results of a proper UCC lien search should indicate if there are any outstanding liens or debts owed for which the equipment is collateral. It is important to note that the UCC search is of the current owner of the equipment only. If you don’t have the correct information on the current owner, the search results will not be accurate. Also, the search must be completed in the state or county where the current owner is located – not where the sale is being completed. Note that liens may stay on the equipment even if you weren’t aware of them when buying the equipment!
- Lien releases. If you purchase the equipment without obtaining a lien release from the lienholder(s), the lien will continue on that equipment following the purchase. It is possible that the lienholder(s) could foreclose on those items at a later date and the funds you provided to the seller could be lost.
- Insurance. If you plan to carry insurance on the equipment, now is the time to contact your agent to confirm that coverage can be obtained on the equipment. You will need to make sure coverage is in place from the time of purchase, particularly during transport from the seller’s location to your location.
- Closing the sale – without any liens. If you confirm that there are no liens on the equipment you now can move forward with the purchase. It is a good idea to complete purchases utilizing a check, ACH or wire transfer, as those provide the best evidence of the transaction. In the event of a cash transaction, receipts should be secured. The bill of sale should be signed by both parties and a copy retained by both the buyer and seller.
- Closing the sale – if there are liens. If there are liens on the equipment, the process of clearing those liens needs to be addressed. The seller should provide details on the creditor, amount(s) due and how the liens will be paid. The lienholder should provide written confirmation that the lien will be released upon payment of an agreed upon sum from the sale transaction. If those details are acceptable, the purchase transaction can move forward. The amounts required by the creditor or lienholder should be provided to those parties directly – either through jointly payable checks or direct ACH or wire transfer. If there are any funds due to the seller in excess of amounts due to creditors, those can be paid directly to the seller by check, ACH or wire transfer.
The purchase of equipment can initially seem simpler and easier than the purchase of some other assets, such as real estate, but there are risks associated with these purchases. Those risks can be mitigated, to some degree, by following the best practices outlined above. In all transactions, make sure to trust your instincts – if the seller is not forthcoming with the required information, then it is best to not move forward with the purchase.
A Farm Credit East loan officer can be a helpful resource in working through private party equipment transactions. Contact us to learn more.