View Full Version : Where do Residuals come from?
11-12-2003, 10:07 PM
Would someone please enlighten me how residual values are determined for used vehichles? Have all of you read the article recently that said for 2003 BMW overtook MB as the leader in vehicle residuals. I believe the article stated that a 3 year old car had, on average, retained 54% of its original value. BMW was now on top with that 54%. I look at it the other way. The car has lost 46% of its value only after 3 years???? :eek: What's up with that. In 1990 I bought a Mitsubishi 3000 GT VR4 for $32,000. I sold it after 9 years in mint condition, with 29000 miles on it for $15,000. My 2000 BMW 540i was purchased for $52,000, and 3 years later it was still worth $40,000, according to the residuals, giving it a 77% of its original purchase price. So why are we supposed to be excited by BMW's coup over MB this year, in that Bimmers will be worth 54% of their original value after 3 years. Who sets these numbers, and why are they so low? Why do luxury vehicles depreciate so fast. Any thoughts on this?
11-13-2003, 02:44 AM
Most cars lose between 10 and 20% when you sign on the dotted line. They go from new to used, even before you drive them.
I don't know where you get a value of $40K for your 540i. I just checked Edmunds, and based on a pretty well loaded car, it is worth $32K dealer retail, or 64%. Trade in is only $27K.
Residuals are based on the prices the cars are sold at after the specified times. And remember it is for the entire line. Not all models hold their value as well as others. I suspect your 540i holds its value better than a 528i would have. Less common.
11-13-2003, 08:59 AM
All vehicles depreciate rapidly when you're talking about wholesale value. Wholesale is all that matters to a lessor because they aren't in the business of selling used cars so when a car is returned they sell it wholesale to somebody who is in the used car business.
Each leasing company has to determine for itself what residual value percentages to use. But just as in any other financial services business, nobody wants to wind up out in left field so the residuals used by different lessors will be very close if not exactly the same. In finance it's okay to be wrong when everybody else is wrong but when you're wrong all by yourself you get fired.
The residual percentages are based on recent data about how much the various makes and models of cars sell for at the wholesale level. This data is always a lagging indicator of a car's value and sometimes it predicts that a car will be worth a lot more than it really is at the end of a lease. On a 2000 Ford F-150 that I recently turned in I estimate that the lessor took about a $5k hit on termination.
11-13-2003, 05:24 PM
There is also some pressure for high residuals to reduce lease payments to sell cars on monthly payment.
Lots of factors, but residuals on cars sold toady are WAGs (Wild A** Guesses) as to the future value of the vehicle.
Sometimes they win, sometimes they lose.
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