Yup! I couldn’t agree more.
Say you buy out the car three months into the lease. Would the lower selling price and inflated MF win out — since the buyout doesn’t include the finance charge?
Good question… I know you’re playing devil’s advocate in order to trigger more discussion. And, I was hoping someone would jump in… so, thanks for that!
Given that the monthly payment and upfront expenses are identical for either option, the question is which option wins out in the event of an early buyout: (a) lower money factor and a higher net cap (via higher sell price) OR (b) a higher money factor and a lower net cap (via lower selling price)?
The answer is it depends upon the relationship between the amount of spread (increment) between the net caps and the actuarial rate (i.e., interest rate) used to amortize the lease. At what point in time over the term of the lease is one option more advantageous than the other? Alternatively, at what point is the lease balance of one option lower than the other? It’s the outstanding lease balance that we’re after in both options. One could perform a cost-benefit analysis or apply some mathematics to make that determination. Or, one could simply eye-ball it (without any science) which is what I did (I’m getting lazy)
Considering the two options:
Deal A
MF: .00182
dealer discount $7800
monthly payment all in $650
Deal B
MF: .00222
dealer discount: $8450
monthly payment all in $650
The estimated implicit interest rates are 4.37% and 5.33%, respectively… almost a 1% differential. The 4.37% would command a higher selling price to the tune of an additional $650 over that for the 5.33% interest rate. So, the question is where is the break-even point? If one terminates the lease very early, the lower sell price is likely the better alternative. But, how early is early… back to the break-even point.
Just my thoughts.
It’s a zero-sum game. Their gain is your loss
Dealer gain is manufacture loss, customer lost nothing here if full term. And if you have MSD, customer win as well in some case…
No MSDs with BMW anymore, unless you’re rolling one over from a previous lease.
Pilot going on in the east coast. Msd’s Available.
Or in states that tax only the depreciation (not sure if there are any left) or extra surcharge taxes on a selling price above X like NJ
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If the lease matures (goes full term) under either option… No one loses and no one gains (including the dealer and manufacturer) as the reserves have been exhausted (amortized to zero) on both sides of the ledger. Still a zero-sum game (0 + 0 =0). Where the non-zero gains and losses occur is in the event of an early buyout. The break-even point, of course, is the exception in which case, no one gains and no one loses.
Flawed logic, I think. The dealer that gives extra $650 off may have $3,000 bonus coming their way (for whatever reason) while the other does not. So they get more in the end on top of marked up MF.
The bonus issue is a completely different matter and doesn’t even enter into the equation because it is exogenous, not endogenous. We’re talking about reserves, not bonuses. Don’t confuse bonuses with reserves as they are completely different. Although, your claim could occur at the margin but, it’s not likely. No flawed logic on my part.
For a dealer to make up the $650 in selling price, they probably have to gross around $928 in reserve to net $650. They have to split the take with BMW Financial. So, not zero sum from the dealer’s point of view. Some other reason for the total gross front & back to drop by (let’s say) $278.
I’m talking about bottom line - which dealer possibly wins in this scenario.
Here is the original question, if you got sidetracked:
A higher MF means the dealer is eligible to collect reserves as a reward in exchange for the higher MF. Perhaps some fund providers give a bonus as an incentive to write X number of leases at a higher MF. However, that bonus has absolutely nothing to do with any one lease written at a higher MF in terms of gains or losses associated with anyone of those leases. In other words, it is not an incremental benefit that one can split and allocate to each lease underwritten at the higher MF. Bonuses are accounted for differently than reserves meaning that bonuses and reserve go into different money buckets. I’m reasonably sure that most, if not all, dealership accountants would concur.
OP here. I am very glad I asked that question. It stimulate a lot of interesting conversation on this complex topic–things I didn’t even think about.
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The dealer that offered the deal with the higher MF is taking a haircut for (say) 30% of the payment that is represented by the 0.00040 markup in the rate. It’s probably due to something as simple as the dealer with the higher MF having a policy towards marking up the rate more then the dealer at the lower MF. Since the drive-off and payment are the same, I suspect one of the dealers had to match the other’s payment. It could have been either one.
Without the original numbers, this becomes guesswork and a puzzle. 0.00040 is a pretty good markup. I tried crunching some numbers and they don’t add up.
@MoneyTime - do you have all the numbers for both scenarios? What was the MSRP, selling price, acquisition fee, and residual for each?
I’m not seeing this, delta737h. If the dealer’s participation was $1,080, the gross difference in all the payments was $1,543 ($1,080 /0.70), way more than a $650 price difference would account for. A dealer would have to discount the selling price by $1,543 to make room for that reserve. With the payment the same, they’re losing money at the higher MF, not ahead by $1,080 - $650 = $430.
MSDs have nothing to do with this exercise and benefit any lease, regardless of the buy rate or marked up rate. What matters is what the lessee gets in return for the MSDs and if they are worth it.
I’m not seeing this either, delta737h. In the two scenarios, the dealer with the lower selling price and higher MF had to share the reserve on the 0.00040 markup with the lender, so the dealer lost ground and the lender made 30% of the reserve. The dealer lost money and the lender made it instead. Profit from reserve isn’t 100% efficient like it is in the selling price. If the payoff started out $650 lower at the beginning of the lease and ended up the same at the end, where is this break-even point. The principal difference dissolves from $650 to zero.
MSDs are only allowed to bring down the buy rate, not the marked up rate. Why would a dealer allow more MSDs to offset their markup. If the buy rate was 0.00042 and each deposit lowered the rate 0.00008, then 5 MSDs would be the max. If the dealer was originally writing the deal at 0.00082, they would take 5 MSDs and lower their buy rate to 0.00002 and write the lease at 0.00042 and keep the reserve on the 0.00040 markup. A lot of dealers don’t share all the buydown. They might give the customer a rate of 0.00052 or 0.00062 for example, pocketing some of the benefit of the lessee’s MSDs. It’s a shitty move, but very common.
Let’s all take a deep breath, stand back, and look at this thing…
First-… OP never mentions anything about MSD’s. MSD’s are irrelevant and don’t exist in this example. So, I have no idea why some posters reference MSD’s. Second, I did some analytics and discovered that the scenarios OP provides are an exercise in futility because they are impossible to achieve. So, it’s no wonder, KD, that you thought this whole thing is troubling and very puzzling. A difference of $650 in the sell price translates to a difference of $650 in the adjusted (net) cap. This, coupled with the two money factors of 0.00182 and 0.00222, will always produce two different payments regardless of any combination of term, msrp, and residual selected. I also thought it was very odd that the lease payments of $650 OP provides just happened to match the difference between the dealer discounts of $7,800 and $8,450. Please understand that this is not meant to impugn the OP. But, I have to wonder how he or the dealer arrived at the numbers provided as they don’t make sense. Something is missing assuming that the DAS amounts are the same and the adjusted caps differ by $650. Here is just ONE example…
So, KD, you were right in asking @MoneyTime for all the numbers in each scenario. I would challenge him to provide two such scenarios in which the monthly payments are identical at $650, adjusted caps differ by $650, and, term, msrp, residuals, and DAS amounts are the same.
Is this practice/rule universal across all/many manufacturers or just Volvo? The why would be a situation (like many on here) where deal is negotiated and MSDs arent brought up until lessee is in finance office to finalize paperwork, finance manager adds MSDs, recreates paperwork and you sign and are on your way. Not sure if finance guy has that much freedom or needs to clear MSDs with GM or SM.
I think if you change the MSRP a bit, you will get same payment at one time.