QuestionHi Roger, I have been looking at various higher end autos on a site where people with leases are attempting to get out of them. If I was to find the car I want, do you think there is a possibility there would be a financial benefit to me to take over the lease with the intention of buying the car at the end of the lease? I understand there are many variables involved, but generally speaking, has your experience demonstrated this idea might have merit? It seems to me I would want to take over a lease with less than a year left. In this case the original lessee would have paid down much of the depreciation during the preceding several months of the lease. Your thoughts would be greatly appreciated. John
Answer
Florida Car Dealer
Dear John.... (Just kidding)
John,
First off let me give you the short answer: NOOOOOO!!!!!! DON'T DO IT!!!!!!
The good news is you don't have to just take it on faith because there is also the longer answer filled with the pros and cons of this new way to lease/ buy a car.
First a quick reminder on how auto lease work and how the monthly payment as well as the lease end value (LEV) come from. After 20 years of selling and leasing cars I can make a convincing argument for either side depending upon which way my store would make the most profit. When I answer questions here, I take off that hat and try to advise people as though they were one of my own family members. The one overriding consideration in this discussion is this:
"Leasing = Renting” ( not 100% true but true enough that you need to at least consider it)
Not to say there are never situations where leasing makes more sense than buying...only that based upon what you have told me ...it doesn't make more sense for you. Here are a few important terms you will need to understand to make sense of this:
1. MSRP (before any discounts)- You would get this number from the window sticker...it's the highest MSRP number you can find there.
2. Net Cap Cost -The amount you pay for the car after money down, rebates, trade equity and after adding acquisition fees and DMV fees , things like that ...if you were buying the car it would be the amount you are financing (vehicle)
2. Lease End Value - This is the amount you will be able to purchase the vehicle for at lease termination
3. Money factor - is the equivalent to the interest rate if you were buying. You will NOT be able to look at this number and be able to tell what the comparable interest rate would be without crunching some numbers first. When you are told your "interest rate is 3.99%" you know what that means ...when you are told that your "money factor for this lease is .0012, you don't know whether you should smoke a cigarette or call the police~!
4. Residual Value- This is the vehicles estimated value at lease termination... This number is based upon a number of factors ... historical sales figures etc.
I am giving you this information so the rest of my answer makes as much sense as possible to everyone who reads it.
Let's go back to your question now: (BTW I just spent some time sifting through www.swapalease.com", and "www.takemypayments.com" and "carleasedepot.com" just to make certain I was up to date on the program offerings currently out there) I admit to having a personal weakness for "The Ultimate Driving Machine" (I am in therapy for it) ...a.k.a. The BMW M6!! So I will use the M6 as one example to make my point. My search at WWW.SWAPALEASE.COM yielded 5 M6's available for lease. The payments remaining were all between 7 and 9 months and the payments were a low of $1,169.00 (7 mos) and a high of $1,829.00. (7 mos). OK, you are hopefully thinking:
"Wow! why such a huge disparity in the payment amounts?" ....BECAUSE EVERY SINGLE CAR DEAL IS DIFFERENT THAT'S WHY! Maybe the person with the higher payment rolled 10k of negative equity from a trade-in he did when he leased this car?, maybe he was a grape and didn't negotiate the price at all, or maybe because he didn't take the time to figure out what the true impact of the money factor he was paying and the dealer was able to write up the rate and really lay him away?
Consider the following points to consider:
1. One thing you mentioned was:
"In this case the original lessee would have paid down much of the depreciation during the preceding several months of the lease"
This makes sense to me too however it isn't how leases work ... The only way your observation would be a true advantage and reason to do it is if the original lessee had been required to pay the ACTUAL amount the vehicle had gone down in value each month...you are right ...most of the breathtaking free falls in value happen immediately... BUT that's not how the bank calculates the payments... very important EVERY SINGLE PAYMENT (USING $1,000 /MO AS AN EXAMPLE) ALLOCATES AN EQUAL DOLLAR AMOUNT TO THE DEPRECIATION COMPONENT OF THE PAYMENT AND THE INTEREST COMPONENT OF THE EQUATION...I.E. $1,000 / MO = 123.64 MO is interest and the balance is depreciation...and it's that way in month 1 and it's that way in month 36 or 48 or 63... What looks like something that works in your favor conceptually actually works exactly the opposite way.
2. If your ultimate goal is to find one of these leases and jump on board with it with the idea in mind that you are going to buy the car at lease term ...then as a rule" NEVER PICK A LEASE WHERE THE ORIGINAL LESSEE FINANCED THE LERASE THROUGH A CAPTIVE LENDER! What do I mean? Using the M6 as an example: ALL 5 OF THE M6S LISTED LEASED THRU BMW Financial Services ...the lending arm of BMW. With a Ford it's Ford Motor Credit Co. etc. why is this bad if you plan on buying the car at term? Because these banks are in the car business ...they exist to enhance auto sales for the mother ship. They do this by assigning residual factors (expressed as a % of the MSRP and calculated based upon the term of the lease and the mileage restrictions...i.e. 36 mos, 12,000 a year for an M6 = .60 (60%) of MSRP = The Depreciation you are financing. It goes without saying that the higher the residual ...the less depreciation being financed and amortized across the term of the loan ...which equals a lower payment! The residuals offered by the captives is almost always the highest out there (= lowest payment AAND HIGHEST LEASE END VALUE!) By comparison ...B of A is bank who is in the banking business and not the car business ...Honda Financial of NA os a bank which exists only to help sell more Hondas and is in the car business and understands the car business. At lease term ...B of A does NOT want your car back to get rid of and hopefully not get their butt handed to them ... Ford Motor Credit wants your car to go back to them because they want to lease you another new car ...that’s why their best terms are at 24-36 mos and B of A's are at 48-60 mos.
3. Finally, I have to admit that I can dream up almost as many scenarios where you could come out ahead. The key factors in giving that idea a a chance are these:
a) NEVER DO BUSINESS WITH ANYONE IN FLORIDA OR NEW YORK ...ESPECIALLY FLORIDA! (read that as many times as you need too until you believe it)...In my informed opinion, the slickest con men in the world are all down there waiting by the phone for your call. I am not joking ...In my experience nothing out of Florida is real! (see the picture of a Florida Dealer attached to this response)
b) Run from any 'used car lease" you are offered or inquire about. There are lots of cars out there that were leased as used cars... the financing options don’t include the captives (except for some 'certified pre-owned cars') That means you are dealing with real banks and real banks (as we have learned above) are not in the car business and their residuals are low and the payments are higher.
c) Demand to see the original lease contract ...no matter what. Look for items that were either cap cost additions and cap cost deductions i.e. negative equity and money down/rebates etc.) Do the math and convert the money factor to a comparable APR and see if it makes sense.
d) Lastly, with rates so low and everything else being equal ...the payment on a 72 mo purchase is comparable (usually) to a 36 mo lease only at the end you own it on the purchase. Never consider taking over a lease on a car you haven't touched with your own hands and had inspected. In one of the M6 ads the original lessee talked about taking the car to the track and taking it up to its 206 mph mechanical rating... do you really want to be responsible for the wear and tear caused by someone else driving it for 2 years with his boot up it's ass? Didn't think so.
Feel free to ask any follow ups or to send me any offer you are considering and I can walk you though it and tell you what i think. They aren't ALL bad but an uneducated buyer would be easy prey for "Mr. Florida Lease Swap 2011" to take to the cleaners and leave holding the bag. Feel free to ask as many follow ups as you need ...my personal email is roadloans@gmail.com Just know that I am committed to hanging with you on this until all of your questions are answered to your satisfaction so that you are able to give me the highest ratings possible when we are all thru.
