How does Dealer make money in a lease? AKA reinvent the wheel

If leasing is a contract between me and the car finance company ( like BMWFS / Audi FS / Toyota FS), I am paying all the money to the company. How does the dealer make money ? How does it matter (to the dealer) what MF/RV is being offered to me, when the payment will directly go to the company ? I am asking this because its been said that dealers can artificially inflate MF.

I understand that dealers can offer lesser discount on MSRP and demand greater customer contribution towards cap cost reduction. But apart from that Drive off fees, no money goes to the dealership, right ?

Please help me understand this.

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If the dealer marks up the mf, they get a kick back from the finance company for doing so.

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They get paid the full amount for the car from leasing company. It is no different to them them if you paid cash for the car. They also make money on finance like you alluded to but adding on points to the money factor. In addition to that they make money on F&I by selling Tire and Wheel warranties and things like that.

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The leasing company buys the car from the dealer and then rents the car to you.

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If you are truly interested, you can read the annual reports of Autonation or any other publicly traded dealer. All of this is publicly available information.

But the real answer is that it doesn’t matter. Consumers don’t have to concern themselves with how dealers make money any more than they concern themselves with how Walmart or Apple or Amazon make money. ’

Channel your time & energy into finding the right deal for yourself. It doesn’t matter what’s happening on the other side. Ultimately you will never, ever know how much money was made or lost on that particular VIN.

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The reason I don’t care about how Apple makes money is because I can’t negotiate the price of iPhone

I can however negotiate the cap cost of the car

While your reply was with good intentions, it did not answer my question. Thanks.

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It doesn’t matter whether the item is negotiable or not. You can buy a house or a trinket from a bazaar, it doesn’t make a difference. Understanding the seller’s cost/profit gets you nowhere. Go make an offer on a house right now and say “I’m offering you X more than what I think is your cost”

Hint: whether it’s a house or a car, this strategy will get you nowhere. Negotiate the selling price, and then pull all the levers that reduce total cost that go beyond negotiated selling price: incentives, MSD, OL, Penfed/Costco, PPM, Onepay, etc etc etc just to name a few.

That’s what this forum is all about. You can keep it relatively simple or you can reimagine, reinvent and reverse-engineer the wheel. Your call.

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So if you determine the true dealer cost of a car (which you never will) and you find a way to factor in things like volume bonuses, other sales target bonuses, etc, what are you planning on doing with that data?

Sometimes dealers are motivated to sell for under cost. Sometimes they’re motivated to sell for significantly over cost. Market conditions are going to drive a lot of that.

The goal here ultimately is to be able to react to market conditions and optimize your position. That requires more insight into market conditions than it does into a nebulous cost structure.

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So, is the MF negotiable and how do you know what the actual/true MF is?

Having current, accurate information for residual value, money factor, and incentives is important in understanding your deal. As such, going directly to a source that has access to that data from the captive banks is your best option. The forums at Edmunds are where we go to get that information, as they have direct access to it from the captive banks. You’ll want to post in the model specific thread for the vehicle you’re interested in and request the most current numbers for your zip code. It is often easiest to find that thread by searching Google for “Edmunds lease” followed by the model of vehicle you’re interested in.

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Definitely MF.

Can’t a dealer simply tell you that the MF information you have is wrong?

Yah, and you can simply tell them you’re going to do business elsewhere if they’re going to be dishonest.

Ultimately, it really doesn’t matter though if the dealer is marking it up or not. You should be setting your target prices based on the current programs and looking for a dealer to do your target deal. If they would rather show a larger discount and mark up the mf to get to your target, more power to them. Sometimes dealers are incentivized with bonuses from the bank for hitting a certain number of deals with marked up mfs. If they can dip into that bonus money to go deeper on a discount, it’s a win win (this is also part of why one will never actually know the true “cost” of a vehicle and why some dealers may be motivated to do a particular deal under “cost”).

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It’s a fine line to walk, because dealers can also choose if they want to sell a car to you. Same way we don’t like outsiders telling us how to run our business, car dealerships can be as friendly, or as obstinate, as they want to be. Which is why the method of making your offer needs to be a very educated offer or you risk getting ghosted. And you will need to cast a very wide net of dealers to reach out to.

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There is really no such thing as a true or actual MF. Say you research a car here and find the best pre-incentive discount was 6%, after plugging in incentives, MF and RV from Edmunds that comes to an effective payment of $450. If a dealer can match or beat that with a higher MF, why wouldn’t you go for it?

I was talking to a bmw dealer the other day, and he basically insisted that his spread on a sale is 6.5%. This is on an 8 series. Anything beyond that depends on “trunk money”/flagship and there is none of that right now.

This got me really curious, because I’ve seen quite a few posts and spreadsheets talking about 8-9-10-11% off before incentives. How does this all work out? :slight_smile:

There are multiple income streams on a vehicle. His spread may be 6% on gross, but he’s still making money in a bunch of other ways off it.

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That’s pretty standard language for a BMW dealership. Our local ones say that “we only have 6% profit on each car, and that is why we only discount 3% and split the profit with the customer” Now this doesn’t include holdback, volume bonuses, finance department profit from marked up money factor, dealer add-ons and service plans, etc.

The only people who buy locally pay almost full sticker, and do little if any research. It’s mostly people with more money than sense. I always lease out of state, and shipping costs still make the deal much more attractive.

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A dealer makes more than the sales person on a sale. Your sales person more likely than not just makes money on front end gross, meaning a percentage of the profit above invoice. This is about 6% for BMW. The dealer CAN earn extra bonuses from the manufacture based on volume, CSI, etc that sometimes the managers get paid on, but a majority of it is house money. That is where the extra 5-6% comes from you see in other posts.

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Right, i figured as much. Is there a rule of thumb i could use to estimate the “actual” profit that’s in play here? Let’s assume there really is no flagship money right now.
What’s a bit puzzling is that I’m not imagining lines and lines of people wanting to get their hands on an 8 series, while dealerships definitely have them stocked.