To: e36m3_at_topica.com
From: Hunter Johnson <hjohnson_at_dbmail.debis.de>
Subject: [E36M3] Any negotiating tips on lease end with BMWNA?
Date: Fri, 07 Jan 2000 00:26:44 -0800

Jason writes:

"My M3's lease is up in a few months and I'm planning on purchasing the car. I'm about 10K over on miles. Does anyone have advice/experience on how to get the best price from BMWNA...or am I stuck paying the residual cost outlined in my lease no matter what?"

The short answer is that you pay residual.

I used to be the lease financial swami for one of the Big Three, so here's the analysis:

First let's set some assumptions. Let's say you've got a 36,000 mile lease and your residual is around 65% (same as my 3 year low mileage lease), so you've got a residual value of around $30,000 on your $45,000 car. Two problems: first, the wholesale of your car when new was about 85% of sticker, or around $38,300, so the depreciation curve for the wholesale value of your car is around $0.23 per mile (straight line -- our models actually used a logrithmic decay formula for computing expected auction prices). With the additional 10,000 miles, then, your car might be worth at wholesale around $2,000 less than residual. If your car is worth $2,000 less, then one asks "why buy it?".

The why of course is that BMW will charge you 20 cents a mile for excess mileage. So you're out the $2,000 regardless. Finance 101 teaches us that sunk costs, even if not incurred yet, are to be ignored.

So the question boils down to this: If wholesale (auction) prices for a 46,000 mile 1997 M3 are less than residual value less the excess mileage charge, excess wear and tear charges, disposition fee, and any other end of lease expenses, then BMW might be inclined to give you a discount -- provided that the dealer has a glut of these cars on their lot.

You see, once you exercise your put option (and give the car back), the dealer has the right of first refusal. Often manufacturers will cut the dealer a deal just to keep the car out of auction, thus helping auction prices remain high. This is especially the case with vehicles which the manufacturer gave residual points as an incentive for leasing the car (the 1998s had 2 points of residual, from 60% to 62% for a 45,000 mile lease, plus 3% for a low mileage 36,000 mile lease -- residual values are typically set by a California firm called ALG, who have pretty cool computer models which crunch auction results across the US). So even if the auction price of your car is in our example $28,000, which might be fair for a 46,000 mile M3, BMW NA might tell the dealer that they can have it for 5% less than that, or $26,600 to ensure that you don't see bunches of M3s at Mannheim.

Note of course that the retail price for an M3 with 46,000 miles might be closer to $30,000. Hence, the dealer makes another $3,400 gross profit on the trade when they sell your pristine M3 at retail. Which is a completely realistic figure for a $30,000 car, new or used. Typical mark up on a new car is 15%, plus the dealer gets F&I and Warranty income. Used cars get a better markup since you can't drive down the street and find the same Yellow M3 sedan with sunroof, cruise but no heated seats with 46,000 miles -- in effect, a used car is more scarce than a new car, and you pay a premium for it.

So now you ask, if my car is worth $30,000 at retail and I can buy it for $30,000 (which in that case you do not pay excess mileage charges), why not buy it and sell it and lose $0 (instead of turning it in and spending $2000 + $350 disposition fee)? Answer is that you also have to now pay the remaining sales taxes on your $30,000 car -- in Michigan that's $1,800. By the way, with leases, you also pay sales tax on interest paid to BMW Financial Services.

So either way you're stuck paying $2,000 to get rid of your M3. Of course, if you want the car, and you think it is worth $30,000 then you buy it no questions asked, and since you're asking if you can get a deal, you want the car. Even if it is only worth $28,000. That's the magic of excess mileage. It pays to estimate very carefully and not just spring for the lowest monthly payment. The 3% bump on my lease represents $1,350 for an additional 9,000 miles, or $0.15 a mile. BMW FS charges me $0.20 a mile if I go over 36,000. So I won't be going over 36,000 miles.

The simple fact is that we (lease finance guys and lease marketing guys who work for "captive" finance companies such as GMAC, CFC, FMCC, BMW FS, Mercedes-Benz Credit, etc.) make it so that you are inclided to buy the car at lease end -- and leases through banks are designed so that you HAVE to buy the car at lease end to avoid extreme end of lease payments.

So the analysis goes:

If you want the car and it is a keeper for the long haul, don't lease. You are paying taxes on interest (bad idea) and you are paying for a put option you have no intention of exercising. Leases are more expensive in this case, and you should have bought the car outright and financed it over 5, 6, 7 years. Better yet, pay cash.

If you don't want the car after 2, 3, or 4 years, lease it. But understand you are paying a premium for this service. Leases typically work well in this case only when the manufacturer has significant residual and interest rate incentives in place, and you don't care what you drive -- Ford had $200/month Tauruses a while back, and that's perfect if you are willing to jump from Ford to GM to Chrysler to Honda to Toyota -- whomever has the lowest price lease for the car.

Personally, I leased due to rule 3: Track the car, and if it falls apart by 36,000 miles, give it back. This is a special case for us track guys, since the car is also under warranty during track days. Apart from a misshift, nothing can go wrong (my dealer even replaced rotors and pads after they were warped), and the risk is minimized.

Finally, for those of you who still like leasing, here's how to compute your monthy payment:

Depreciation = Capitalized Cost (purchase price plus fees, taxes, etc. less downpayment) - Residual Value
Depr / month = Depreciation / term

Monthly Service Charge = Service Charge Factor (SCF) x (Cap Cost + Residual Value)

Monthly Payment = Depr / month + Monthly Service Charge

Why SCF x (CC + RV)? The service charge factor is 1/24 the annual interest rate (simple, not yield basis), so

Monthly Service Charge = SCF/12 x (CC + RV)/2

In this case, (CC+RV)/2 approximates the average outstanding balance on the lease (you start at Cap Cost, depreciate to Residual -- divided by 2 to get average). Multiplying the average balance by the monthly interest factor gives monthly interest charge. That's why most manufacturers use this SCF of 0.00300 or so -- multiplying by 24 gives an annual interest rate in this case of 7.20%. Nifty, huh?

In case you wanted to know.

Hunter
1998 M3/4 36,000 mile lease, 23,000 miles right now. Right on target at 1,000 miles a month!