Ready to turn in your lease? Record used car prices could mean a financial bonanza

For savvy motorists who’ve been leasing vehicles they’re now ready to turn in, record-high used car prices could mean a financial bonanza.

After tumbling to recession-era levels during the early months of the pandemic, the auto market roared back with a vengeance early this year. Dealers are struggling to find product to sell, fueling surging prices all around. With few new cars on showroom lots, motorists have been snapping up whatever used cars they can find.

Josh Frankel, a New York-based financial consultant, found that his leased 2018 Jeep Compass was worth $18,000 on the used car market — nearly $3,000 more than the buyout value in his lease contract. So rather than turn the SUV back in, Frankel struck a deal to sell it to a used car wholesaler.

“It couldn’t have been easier,” he said by phone. “I didn’t have to lay out a penny. He came to my house, I handed him the keys and got a check.”

When they calculate lease prices, finance companies estimates the residual value of the vehicles at the end of the leases — essentially guessing what they will be worth. The figures help calculate monthly payments. But they’re also used to set buyout prices customers can pay at the end of the leases to keep the vehicles.

The folks who determine residuals are normally quite good at it, said Michelle Krebs, principal auto analyst with Cox Automotive. But they didn’t count on a combination of Covid-19 and a crippling shortage of semiconductor chips.

“Lease buyout prices were set three years ago, when they never thought used car prices would be this high,” Krebs said.

As a result, many lease customers are buying out their leases and then immediately reselling the vehicles. And, like Frankel, pocketing the difference.

“Used car prices have gone crazy,” said Wes Grueninger, a mobile tech developer from Seattle who leased a 2019 Honda Ridgeline.

In June, he went online and found Carvana offering $36,400 for the truck, a handy premium over the $29,000 buyout value. It was a deal he couldn’t refuse.

“I wouldn’t have believed it if it didn’t happen to me,” said Grueninger, who wound up netting almost $8,000. “Who would pay that much?”

While such deals can be tempting, Krebs warned that buying out a lease doesn’t always work so well. “The lease laws vary widely state by state,” she said, stressing that “people need to do their homework as to what the laws are.”

That was advice Nicola and Joe Pariseau of Atlanta could have used before they decided to buy out the lease on their Volkswagen Tiguan and then resell it. At first glance, it seemed like a great move, but they hadn’t calculated into the equation the $1,800 in taxes they had to pay the state before transferring the title.

“We thought we were golden. But in the end, we wound up losing a few hundred dollars,” Joe Pariseau said.

Nicola Pariseau added, “It ended up being a fiasco.”

There are other reasons to think twice before buying out a lease vehicle and then reselling it. The big question is — what next? If you already have another car, you could be in great shape. But if you need to turn around and buy another vehicle, your profits might be fleeting.

Debbie Mazza was “counting down the days” until she could end her 2018 Toyota Camry lease, especially when she “found my car was going for $5,000 more than what my lease said it was worth.”

But before she completed the buyout, Mazza realized that she would need to replace the Camry with something else. When she started checking with dealers, she discovered that everything she wanted was either sold out or going for a lot more than she had expected.

So Mazza has decided to wait, at least for now, until she finds what she wants — even if she doesn’t make a profit on the Camry.

Consumers with cars, trucks or crossovers with leases that are about to end should keep several things in mind:

  • Find the residual value in your lease and check what the rules are for a buyout. They can vary from one manufacturer to another and one lender to another.

  • The residual may not be the same as the buyout price, especially if you’re looking to end the lease early.

  • Look up the vehicle’s current market value using online pricing guides, like Edmunds or the Kelley Blue Book, or used car services with online pricing guides, such as Carvana, Shift or Vroom.

  • Check state and local regulations for buying out leases and then reselling the vehicles. In some states, you might get stuck paying hefty sales taxes or fees.

  • Once you know what your car will go for, subtract what it will cost to buy it out, along with any taxes or fees, and come up with a final number.

  • Factor in potential paperwork and other hassles — while remembering that buying or leasing a replacement vehicle could be more costly and difficult right now.

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