To buy or not to buy?
That is the question that will arise at the end of your leasing term.
It should come as no surprise that the majority of leasers don’t take the buyout option at lease end, and end up re-leasing a subsequent vehicle. This is because most people who currently lease do so because they prefer the leasing lifestyle.
James Ricci, general manager at Roy Foss Motors, which operates two GM dealerships in Ontario (Woodbridge and Thornhill), notes that only 10 percent of his lease customers do the buyout thing. And Roy Foss Motors does a lot of leasing.
“General Motors is now aggressively focusing on leasing,” says Ricci. “Their goal is 12 percent leasing nationwide. At our dealership we’re about 53 percent. It’s strong for us. It’s typically higher when you get into more luxury vehicles. We’re Canada’s largest Cadillac dealer. We’re about 75 percent (leasing) with Cadillac.”
The low take on buyouts is corroborated by Viraf Baliwalla, a consumer advocate and president of Automall Network, a vehicle buying agency. Baliwalla feels a lot of that has to do with the nature of the leasing customer, as well as the “ultra conservative” nature of today’s leasing climate.
A decade ago, automakers purposely inflated the residual or buyout amount as a way to lower monthly lease rates and entice customers to their models.
That didn’t work. When customers returned the vehicles, leasing firms ended up with mountains of over-priced used vehicles.
Now, residual values are established as close as possible to their actual projected resale value, as determined by third party entities such as ALG and Canadian Black Book.
“The automakers and the leasing companies want to make sure they are not getting hit at the back end,” says Baliwalla. “We’re not seeing wide variances between residuals and actual market values. Not many vehicles we’ve seen made it worthwhile to buy out at lease end.”
Let’s go buyout!
Still, 10 percent is nothing to sneeze at… That means that one in ten customers crunches the numbers and decides to purchase their leased vehicles.
And there will always be scenarios that make the buy-out the better option. Let’s review them…
Low Kilometres — Check your contract for the exact number of allowable kilometres on your lease, but typically you get 20,000 kilometres per year. So if your three-year leased vehicle only has 40K on the clock, it’s probably worth more than the buyout price, which was factoring in 60K.
Obsessively Pampered — Any exceptionally cared-for vehicle is another obvious candidate for a buyout.
Willing Buyer For a Flip — Maybe a relative or friend or neighbour has always admired your ride, and is ready to pay out your residual with a little bit extra for you.
Used Vehicle Price Shift — Maybe the used car market scene has shifted in your favour, from when the projected resale value was first established.
And take note that the current market for good, low-mileage used vehicles is tight and therefore pushing prices up a bit. This happened because new-vehicle sales were low following the economic calamity in 2008.
Market Price Higher than Buy-out Price — This can easily be determined by consulting Autotrader and Kijji and the like. But Baliwalla cautions to remember that sellers usually end up taking less than their asking prices.
You could also shop the vehicle around to the used car managers of dealerships, and see what they’re willing to give you.
Note also that the residual value is a wholesale price, so if you’re willing to do the work to make it retail ready (reconditioning, safety, detailing, etc.) then go for it…
The Devil You Know — “You know your car better than anybody,” says Baliwalla. Maybe some things that would turn off prospective buyers don’t bother you. Or maybe you’ve shelled out for significant repairs that will put your vehicle in good stead for the long haul.
Wear and Tear Charge Avoidance — If you’ve racked up a big invoice because your vehicle completely failed the lease-end vehicle inspection report, and you’re not into paying charges for excessive wear and tear and extra kilometres and/or don’t have the reserves or financing to do so, just buying the car and continuing to drive it may be your best alternative.
Caveats and Safety Tips
“Just because you can get your vehicle at a reduced price doesn’t necessarily mean that it will be a lower cost of ownership,” says Ricci.
In other words, a cheap car with insatiable needs is not a cheap car in the long run. You may also just feel uncomfortable owing and driving an older vehicle that is out of warranty.
You will be on the hook for the safety and any emission tests. Basically the leasing entity will be selling the vehicle to you “as is.”
We’ve even heard tell of a dealership salesperson suggesting to a customer that he would also be on the hook for bringing the vehicle up to the “manufacturer’s standard,” before he could buy-out the vehicle. This, of course, is complete nonsense. That salesperson probably had a buyer lined up for that lease vehicle, and did not want the buyout to happen.
If you’re looking to “flip” your ride after the buyout, you also need to consider the sales taxes you will have to pay, and the hassle and various other expenses associated a re-sale to another other party.
After the decision is made, it’s a pretty straightforward process to actually purchase your leased vehicle. About 60 days before your current lease ends, your leasing provider will contact you, advising you of your end-of-lease options.
It’s useful to keep in mind that you are buying the vehicle from a leasing company, which owns the vehicle, and not the dealership, which just facilitated the transaction. In GM’s world that means GM Financial, which will have you fill out a termination report, where you indicate your intention to purchase the vehicle at the residual or buyout amount stipulated in your leasing contract.
Ricci says this amount is “not negotiable.” But you can always try…
GM Financial would then provide a document showing the amount owing, which may or may not be made higher by an extra documentation or administration fee by your dealership. You then send them a certified cheque, and bring the vehicle in for the safety inspection and emissions test. Once all the documents are in place, you or your friendly salesperson can change over the ownership at the appropriate government agency.
If you don’t purchase the vehicle, the selling dealer has first dibs. (If the sales staff at this dealership seem a bit too eager about getting your lease vehicle back, that may be an indication you have an in-demand vehicle on your hands.) But, according to Ricci, dealers have to pay the same buyout price. So if you’re thinking the residual price is actually over-priced, and you’ll just wait until the vehicle shows up on the dealer’s used car lot at a lower “correct” price, you’ll be waiting a long time. It’s not going to happen.
If the dealer doesn’t buy the vehicle, it goes to auction, where dealers of the same brand and franchise get to fight over it. If no one ponies up there, it could go to an all-makes auction, where all used car professionals can bid on the vehicle. So theoretically it could show up on some lot, where you could buy it at a lower price, but if you really want it, use your hard-won buyout option.