How to Profit From an End of Lease Buyout
Let's assume you lease a car worth $20,000 and at the end of the lease the car is only worth $10,000. Most of your monthly payment goes toward paying off the $10,000 in depreciation.
Most leases include a buyout price that gives you the option of purchasing the car at the end of the lease.
The leasing company uses historical data to come up with an accurate residual value of the car when you turn it in (basically, they try to figure out how much the car will be worth so they can determine how much you should be charged for depreciation and how much you should pay if you decide to purchase the vehicle).
Most of the time, leasing companies will overestimate the residual value, so when it comes time to turn it in, the buyout price is higher than what the car is selling for in the marketplace. In this case, it's a no-brainer - you just turn in the vehicle and don't even think about buying it.
But what happens if the leasing company underestimated the residual value? Let's assume your lease is up and the end-of-lease buyout price is $10,000 - but the car is selling for $13,000 in the marketplace.
You stand to make $3,000 if you buy the car and then immediately sell it. These situations are rare, but it does happen.
The only thing you need to be aware of is the tax consequences of buying and selling a car. In most states, if you buy and sell the same car within 10 days, you can forgo paying the sales tax. (The buyer is still responsible for paying sales tax, but at least both of you won't have to pay).
In a case like this, you should have a buyer lined up before you purchase the car from the leasing company. Another option is to have the buyer purchase the car directly from the leasing company and pay you a commission (the difference between the buyout price and whatever price they agree to). If you go this route, you need to find someone that is trustworthy and willing to pay you the difference.
Another option if you're ever in this situation is to try to get the dealer to offer a price concession if you agree to lease or buy another car from them. Take the difference in market value and have them discount your next vehicle.
Please make sure to consult with an attorney or contact your DMV office to make sure you are allowed to take advantage of these types of situations in your state.
Question & Answer
Q: I made a deal with a neighbor to buy out the vehicle after his 36 month lease. The leasing company demanded an extra 5% on top of the buyout price because I was not related to him, saying it was their standard policy. Is this normal?
Unfortunately, since the lease agreement was between your neighbor and the leasing company, they do not have to honor the buyout price if you're the one purchasing directly through them.
The way around this would have been to have your neighbor purchase the car directly, then resell it to you immediately.
My Recommendation for Car ShoppersTrueCar No-Haggle, CarsDirect, and NADAGuides are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid