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Chairman of the Bored
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Discussion Starter · #1 · (Edited)
I posted the following in another thread :

"Also, one advantage of leasing is that you have an option to buy or not buy the car for a known amount. Consider that the value of a car at the end of say, three years, is not known. The car could be worth far less or far more than the residual value. For example, media reports that a car is unsafe, like what happened to Audi a few years ago, could decimate the resale value. Or, as happened in the late 1970s, a strong dollar inflation could make the car worth much more than the residual. And so, when you lease, you have a free option which really does have a value as anyone familiar with stock options knows."

If you leased a 2006 Z4 coupe and I offered you $100 for the right, but not obligation, to buy your car in 3 years for the residual ( 50% ) would you do it ? Some might say yes as they have no plans to buy the car and $100 is $100. Others might say no, and still others might say make it $300. The point is this option has value, albeit a different value to different people. Now what about me, if I pay $100 for this right is it a good deal ? If I believe the Z4 coupe could easily be worth more than the residual definitely yes. But who knows how to price this option ? The answer is there should be a market with bids and offers and market makers ( dealers ) for the option to buy various cars at the end of leases. The trouble, of course, is cars are not fungible. Everything depends on condition and miles. But there are standards used now for acceptable wear and tear, the maximum mileage is known, and I don't have to buy the car.

Because I believe there will be inflation in the U.S. in the next several years I think buying these options would prove to be profitable on selected cars. I also believe that a very good living could be made by someone who started a market in these. What do you dealers think about this ?:thumbup:
 

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Isn't this already available

Cars that are turned in and rejected by the dealer go to auction? What could be improved on the current system? If you wanted to sell it privately, you can also go to eBay or swaplease. Just tack on a cash amount to sell your lease.

I'm just trying to apply the better, faster, cheaper rules to how it would be an improvement.
 

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Essentially you want a market for the option to buy a used car at a fixed price in the future, assuming it meets certain standards. So you want to be able to sell the right to buy the car at the residual, while someone might be interested in buying that right. Though the idea is nice I do not think the variation in prices, as measured as a percentage of the residual is high enough to generate enough interest.

Traditional re-sale value estimates are unlikely to be very far off, barring a catostrophic change. A car with a residual of 50% might be worth anything between 45-55% but not much more or less than that, unless there is a fundamental shift. Hence for most people the option may not be worth it, especially since there can be significant variations in the condition of the car.

There are other pure hedges available against inflation and the falling dollar. Most people concerned about inflation are better off using them.

I think there were some companies who offered residual value insurance to lease fleet companies. I do not think the idea did very well. May be Tarry can chip in.
 

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Chairman of the Bored
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Discussion Starter · #4 ·
chrischeung said:
Cars that are turned in and rejected by the dealer go to auction? What could be improved on the current system? If you wanted to sell it privately, you can also go to eBay or swaplease. Just tack on a cash amount to sell your lease.

I'm just trying to apply the better, faster, cheaper rules to how it would be an improvement.
No, what I'm suggesting is not available now. If your car is leased someone would pay you some money today for the right to buy your car at the end of the lease.
The person who paid you the money would be hoping the residual turns out to be too low and they could profit.:)
 

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Discussion Starter · #5 ·
BayAreaBMWFan said:
Essentially you want a market for the option to buy a used car at a fixed price in the future, assuming it meets certain standards. So you want to be able to sell the right to buy the car at the residual, while someone might be interested in buying that right. Though the idea is nice I do not think the variation in prices, as measured as a percentage of the residual is high enough to generate enough interest.

Traditional re-sale value estimates are unlikely to be very far off, barring a catostrophic change. A car with a residual of 50% might be worth anything between 45-55% but not much more or less than that, unless there is a fundamental shift. Hence for most people the option may not be worth it, especially since there can be significant variations in the condition of the car.

There are other pure hedges available against inflation and the falling dollar. Most people concerned about inflation are better off using them.

I think there were some companies who offered residual value insurance to lease fleet companies. I do not think the idea did very well. May be Tarry can chip in.
What is happening now ?
The dealer takes your clean car at the end of the lease, CPOs it, and sells it for $2,000 over. If lots of these cars weren't worth more than the residual there wouldn't be a CPO market. If you are correct with the 45-55% there is a lot of money to be made here. ;)
 

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mclaren said:
No, what I'm suggesting is not available now. If your car is leased someone would pay you some money today for the right to buy your car at the end of the lease.
The person who paid you the money would be hoping the residual turns out to be too low and they could profit.:)
If you can sell the option, why not? I'm not sure how many people would be willing to pay and then wait 3 years for an option to buy a used car.
The cars wouldn't be CPO but maybe you could include a 3rd party equivelent.

Only way to find out would be to try. Make a plan, run a market study then pitch to a VC.
 

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It is really a moot point because the "free" option is not tradeable.

BTW The option is technically a call option but since the alternative to leasing is to buy the car, it could really be considered a put option packaged with a ballon loan. In fact, owner's choice alternative is exactly that.
 

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You're correct about the "put option" concept, but imagine the following scenario:

You lease an expensive BMW for 3 years, and the buyout is, say $41k, but the car's value is only $37k. You like the car, and want to keep it, but BMW won't negotiate the buyout and it burns you up to pay more than FMV. You've already sunk a lot of money into the lease, and leasing a new BMW is even more expensive than before. So your only alternatives are to cave in and pay $41k, or buy somebody else's used BMW on the open market.

mclaren said:
I posted the following in another thread :

"Also, one advantage of leasing is that you have an option to buy or not buy the car for a known amount. Consider that the value of a car at the end of say, three years, is not known. The car could be worth far less or far more than the residual value. For example, media reports that a car is unsafe, like what happened to Audi a few years ago, could decimate the resale value. Or, as happened in the late 1970s, a strong dollar inflation could make the car worth much more than the residual. And so, when you lease, you have a free option which really does have a value as anyone familiar with stock options knows."

If you leased a 2006 Z4 coupe and I offered you $100 for the right, but not obligation, to buy your car in 3 years for the residual ( 50% ) would you do it ? Some might say yes as they have no plans to buy the car and $100 is $100. Others might say no, and still others might say make it $300. The point is this option has value, albeit a different value to different people. Now what about me, if I pay $100 for this right is it a good deal ? If I believe the Z4 coupe could easily be worth more than the residual definitely yes. But who knows how to price this option ? The answer is there should be a market with bids and offers and market makers ( dealers ) for the option to buy various cars at the end of leases. The trouble, of course, is cars are not fungible. Everything depends on condition and miles. But there are standards used now for acceptable wear and tear, the maximum mileage is known, and I don't have to buy the car.

Because I believe there will be inflation in the U.S. in the next several years I think buying these options would prove to be profitable on selected cars. I also believe that a very good living could be made by someone who started a market in these. What do you dealers think about this ?:thumbup:
 

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Robert A said:
You're correct about the "put option" concept, but imagine the following scenario:

You lease an expensive BMW for 3 years, and the buyout is, say $41k, but the car's value is only $37k. You like the car, and want to keep it, but BMW won't negotiate the buyout and it burns you up to pay more than FMV. You've already sunk a lot of money into the lease, and leasing a new BMW is even more expensive than before. So your only alternatives are to cave in and pay $41k, or buy somebody else's used BMW on the open market.
You may be able to buy the car back from the dealer for less than $41k. That said, leasing is not ideal for those who want to keep the same car for years.
 

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I've asked that question, and AFAIK, BMWFS won't negotiate with the dealers either. Perhaps someone can chime in, but I think the car has to go up for auction for BMW to break on the residual.

That said, leasing is good for long term ownership if the MF is low enough.

adgrant said:
You may be able to buy the car back from the dealer for less than $41k. That said, leasing is not ideal for those who want to keep the same car for years.
 

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Robert A said:
I've asked that question, and AFAIK, BMWFS won't negotiate with the dealers either. Perhaps someone can chime in, but I think the car has to go up for auction for BMW to break on the residual.

That said, leasing is good for long term ownership if the MF is low enough.
Lease returns that head to auction can usually be tracked by your dealer and purchased in this case... All you have to do is have an offer to purchase that pre-sets what you are willing to pay, and also give the dealer an out if the bidding goes up too high... (ie. it is not a guaranteed re-purchase.....)
 

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My god, imagine your poor beloved car being put up on a stage while multiple dealers touch, sit in, and otherwise molest your car while you try in vain to get it back into your garage for a cheaper price.

neill said:
Lease returns that head to auction can usually be tracked by your dealer and purchased in this case... All you have to do is have an offer to purchase that pre-sets what you are willing to pay, and also give the dealer an out if the bidding goes up too high... (ie. it is not a guaranteed re-purchase.....)
 

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Robert A said:
My god, imagine your poor beloved car being put up on a stage while multiple dealers touch, sit in, and otherwise molest your car while you try in vain to get it back into your garage for a cheaper price.
:rofl: :rofl: :rofl: All for the possibility of a couple bucks!
 

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Robert A said:
My god, imagine your poor beloved car being put up on a stage while multiple dealers touch, sit in, and otherwise molest your car while you try in vain to get it back into your garage for a cheaper price.
Thank God it is just touching and feeling; imagine if the auctions allowed the bidders to take her out for a test drive :rofl: :rofl:
 
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