Having loan against your yacht adds a layer of complication to any deal. But is it so bad that you should clear the lien before you try to sell your yacht?

The answer depends on the loan, the market for your yacht, and the loan-to-value ratio of your outstanding mortgage. Since most large yachts have some kind of financing on them, it’s worth looking at the risks and difficulties before you list your yacht for sale.

Added challenges selling a boat with a loan

Selling a boat with a loan on it is fairly routine – about half the boats purchased in any given year have loans on them. That percentage rises dramatically when look at boats purchased new. Even small boats purchased by modest income owners are regularly financed. Wealthy yacht owners with enormous vessels may finance their yacht as a cash or estate management strategy even if they could afford to pay cash.

The important thing is that there’s a lien on your yacht that needs to be paid before the new owner can take possession.

The Bank holds the title to your yacht

If your boat is under a loan, you will not have the ownership paperwork in your hands to close a deal. It’s not exactly that the bank owns your yacht – you still own it. But the bank has a lien against your yacht.

This lien gives them first access to any funds from the sale of your yacht to satisfy the loan. To enforce this, the bank holds the title in their possession and notes the lien right on the title. It’s also recorded with government registration agencies. So you can’t just sign over the boat. The bank must give you the title and documentation you need to close on the deal. Even if you somehow had the title, the lien will show up in a search.

And the only way to get the title and lien releases you need? Pay off the loan.

Read also: Should your Yacht Be in a Trust? Pros and Cons

More parties are involved in closing with a loan

On a cash deal for a boat with no loans, you can sell it with just a few signatures and an exchange of money. Of course, it’s rarely that simple. For larger boats, there’s usually a broker or two, and you should have surveys, title checks, and documentation of the vessel.

When you have a lien, the lien holder (the bank) is involved in the closing, because they won’t release the title and lien before they’re paid. It adds steps to the process, and restrictions on the timing of the closing. You must figure in banking hours and processing times for paperwork.

International transactions are more complex with a loan

Selling a boat across international borders is already complicated. Documentation rules, currency conversions, rate risks, and communication with international banks and brokers are all challenging aspects of an international sale that some brokers may find uncomfortable.

If you plan to market your boat outside your home country and you have a loan, make sure your broker has experience with foreign banks and governments. Especially if the boat is located and listed by a broker outside your country of registration, residence, or finance.

If you are upside down, you’ll have to pay out to close

The worst-case scenario for a yacht owner with a loan is when the sale price isn’t enough to pay off the loan. Boats drop in value when they are put in the water and used. With a quick sale after a short ownership period, it’s possible for a yacht to depreciate more quickly than the principal gets paid down.

An upside-down loan is one where the value of the underlying asset is less than the amount owed. Market forces and the economy can drive the value of the asset down, as can wear and tear, accents, and many other factors. But the bank will want every penny of that loan back, no matter what you sell the boat for.

So if you’re selling your yacht for $500,000 and you owe $550,000 on the loan, you must bring a check for $50,000 to the closing.

And that stings.

Being upside down also puts you in a hard place negotiating. Every single dollar you give up is coming directly out of your bank account, instead of the sale proceeds. Intellectually, it’s the same net cash to you in the end, but emotionally it feels a lot worse. It could make you less willing to respond to an offer that already seems much too low.

And one risk: a buyer might take advantage of your situation

Whether you have a lien shouldn’t be the buyer’s concern. Their business is with the price for the boat. But most documented and titled vessels have records with a government agency, and those records show liens. And anyone can look up it.

A buyer who has information they think is advantageous may use it as leverage to get a better price. If they suspect you need to close quickly to stop making payments on a yacht you don’t want, they may press you with lower offers.

It’s important that neither you nor your broker disclose detailed information to a buyer unless you can not avoid it. At least, until you’ve negotiated a sale price. A buyer may ask, but you are under no obligation to give them details that aren’t publicly available.

Once you’ve gotten to a price and are discussing the mechanics of the closing, it’s going to come out in the closing papers. But by then, it’s too late for the buyer to press you.

Read also: Yacht vs Superyacht vs Mega Yacht: which differences?

Who should you speak to before you list your financed yacht?

Always come to any financial deal with all the information you can. Speaking to industry and financial experts can save you time, aggravation, and money. And get your yacht sold more quickly.

Talk to your bank

Your bank can tell you the exact pay down amount on any date, so know where you stand with the value of your boat and your loan. They can also discuss any options about paying down or refinancing the note to help your situation.

Also, find out exactly what the bank needs for the closing, and how long they expect it will take to clear the lien and settle the transaction. If you get the name of the marine specialist in the bank and all that information to your broker before you have a contract, it makes the closing that much easier.

Find an experienced yacht broker

A competent and experienced yacht broker knows more than just artfully staging your boat and drumming up buyers. A superb broker also knows how to walk a deal through from the first showing to the last signature on the closing documents.

For complex deals like large or unique yachts with an international market, seek a broker with experience in handling similar deals. Talk to several brokers until you find one you trust, and make sure they know the answers to the tough questions about your loan situation. Remember, shopping brokers isn’t just about saving a percentage point or two on commissions. Experience with deals like yours is key, and experience pays for itself.

Our advice on selling a boat with a loan

There are a few strategies you can take you feel your loan is a problem. You may need a quick sale, or you may sell your boat in a foreign country to an international market. But our general advice is this – don’t let a lien on your boat stop you from selling it if you need to sell. It’s a common transaction, and brokers and banks are used to it.

Can you repay the yacht loan?

Paying off the loan takes the bank out of the equation for closing, so you can close quickly with a buyer anywhere in the world. It gives you more room for negotiation and more options for optimal deal timing.

There are several scenarios where repaying the loan before putting the boat on the market makes sense if you have the funds. Any international deal will be easier without a loan. Closings will be easier without a loan on the boat. It’s not necessary to repay the loan before you list the boat, but it gives you more options.

If you’re upgrading to a bigger yacht, consider a trade

One easy way to dispense with a yacht loan is to trade your old yacht in for a bigger one that you finance. This is easiest when buying a brand new yacht from the dealer or builder. Selling the old yacht becomes someone else’s problem, and the value of the trade (minus the outstanding loan) applies to the purchase price for the new yacht.

Read also: 9 catamarans for sale under 5 millions

Don’t become a fleet captain

If you find the new boat of your dreams before you sell the last boat of your dreams, think long and hard about buying one before you’ve sold the other. The temptation is great if you have the financing to buy them both, but you’re adding two loan commitments and more debt to your life. And you can only use one boat at a time.

Passing up on the deal of a lifetime before you see your present boat may be tough. Good deals come along more often than you think, and if you take a long time to sell your older, debt-laden boat, you’ll be paying two boat loans at once. After a year or more, that takes some shine off that great deal on the new boat.

Plan your sale and know your numbers

The best way to plan your sale is to know how much you need to sell your boat for to cover your loan. Don’t forget the broker’s commission when calculating that, because the broker will need to get paid. Once you know your break-even number, it gives you a better way to respond to offers and know what you can accept to close and clear the lien.

You don’t have to pay off any loans to sell your boat, and carrying a mortgage shouldn’t affect your ability to sell it. Just be ready and know your numbers and needs.

Frequently Asked Questions

Do I have to pay off the loan before selling?

You must pay off the loan before the title transfers to the new owners. But you do not have to pay off the loan before you put the boat up for sale.

Can the buyer pay off the loan for me?

There’s nothing stopping a buyer from paying the loan off for you before the closing, but it is not a common way to do business. It exposes the buyer to financial risks most will not take. The typical closing process holds all money and titles safely in escrow until they pay everything off, so there’s usually no need for this.

Is there any advantage (or disadvantage) to paying off the loan before trying to sell?

The real advantage of paying off the yacht before listing is to speed up the closing process for potential buyers. If that makes your boat more marketable, it can’t hurt. It will also save you accrued interest on the yacht while you sell, which on a recent loan will be most of the payment amount.
But paying for a large loan can leave you strapped for cash. Especially if it leaves you too tight to keep paying ongoing maintenance expenses, slip fees, and insurance on the boat until you sell it. You bought it with a loan for a reason.

What does a yacht broker do for me in this transaction?

Besides advertising and finding a buyer, a yacht broker assists with paperwork and ensures a successful closing. They will have experience to know the pitfalls of your transaction, and how to keep it running smoothly if any problems arise.
Yacht brokerages also escrow funds for these deals to ensure that everyone gets paid what they are supposed to on time. You can hire a lawyer to manage escrow for you, but your broker can do this and they won’t charge you.

Do I need a documentation agency, too?

Not always. Some brokers have documentation specialists they work with. Knowing the ins and outs of banks, government agencies, and their paperwork requirements speeds up the process. For big international transactions, a documentation agency that can meet all parties’ specific needs is help. Fees for this service may be an extra closing cost, so ask your broker about it.