Collector-car leases are typically “open-end” leases. They also last for a fixed term. However, the up-front consideration — down payment — is much more substantial. And, most importantly, you are legally obligated to pay the pre-determined residual value at the end of the lease term and buy the car outright.
Collector-car leases look more like a financed purchase with a big balloon payment at the end of the term.
Running some numbers
Doug Ewing, Vice President of Sales at Premier Financial Services, helped “Legal Files” with an illustration. To pick a familiar example, say I wanted to lease my new E-type rather than buy it outright. At my $50,000 purchase price, my up-front payment would be $10,000 (a 20% down payment), plus a $995 lease fee and titling costs. My monthly lease payments would be $490 for 60 months. At the end of that term, my residual would be $20,000, which I would have to pay. If I decide to sell the car after 36 months, my pay-off would be $28,667, and I keep the rest of the sale price.
Of course, all of these amounts are negotiable, based upon my creditworthiness and the size of the deal. As I requested, Ewing used mid-range assumptions for the illustration. The interest rate can be anywhere from just over 5% to about 6.5% — in the illustration it is about 5.5%. The 20% down payment can be more or less. The residual, typically about 50% of the amount financed, can be higher in order to reduce the payments.
Ewing said these assumptions can be tailored to the situation. Say you are a well-heeled speculator who wants to make a major purchase — and then flip the car at an auction about a year later. The combination of a smaller down payment, a longer term and a larger residual will produce the lowest possible initial and monthly outlay. When the car sells a year later, the leasing company gets paid off, and you walk away with the big profit on the small cash investment. Assuming, that is, that you picked the right car.
Getting out of the lease
All collector-car leasing companies offer friendly lease exit terms if you want to end the deal. For example, this is the deal with Premier: Any time after 12 months, you can buy out the lease based upon the remaining unamortized balance owed on the car, plus one month’s lease payment. That makes the lease work pretty much the same as a loan.
That is starkly different than the buy-out of a traditional closed-end new-car lease. If you want to get out early, the buyout is pretty simple — you add up all the remaining lease payments, plus the residual, and that’s what you pay and you own the car.
New business opportunities
Sometimes, people need to get out of their leases, especially with new cars.
When the economy tanked a few years back, many people were suddenly unable to make their lease payments. And, to make things worse, they couldn’t get out of their leases.
In response, a number of Internet-based companies were created to match people who wanted out of their leases with people who were willing to take them over. Scot Hall, Executive Vice President of Swapalease.com, explained how this works:
First step: The seller and buyer find themselves on the website, which Hall describes as a “dating service for leases,” and negotiate their deal.
There are numerous variables. Depending upon the value of the lease, the deal could be a straight takeover, or either party might pay the other something to do the deal.
Second step: The deal is submitted to the leasing company to approve the lease assumption.
Third step: Transfer documents are prepared and signed. Once the buyer assumes the lease, he becomes responsible for all future payments and obligations, and has the right to buy or return the car at the end. The seller is off the hook.
Hall describes all this as a big win-win. The seller gets out of the lease without further obligation. The buyer steps into what is now a short-term lease with a fixed monthly payment and can walk away at the end — or perhaps even buy the car and resell at a profit. It’s an easy way to cycle through a variety of cars every couple of years with no big cash outlay.
Traps to watch for
As simple as all this sounds, there are a number of ways that a lease swap can go wrong. First off, the buyer is buying a used car. When the lease ends, the buyer must return the car in excellent condition. If the car needs work, the buyer is required to fix it under the terms of the lease he has assumed. Many leases charge extra for mileage over a set maximum. If the seller has used up a lot of the allotted miles, the buyer ends up paying the tab.
Hall said Swapalease has addressed this by creating a network of car inspectors who will check out the car for a $150 fee.
Hall also said that the risks are usually pretty manageable. These are new cars on leases, and the sellers usually take good care of them because they are required to under the lease. Most important, the cars typically carry new-car warranties, so the risk is fairly contained. Still, there’s a lot of room for hurt here, and the buyer needs to be as careful as in any other used-car deal.
The seller’s biggest consideration is to make sure that the lease assumption relieves him of all further obligations under the lease. Some assumptions don’t do that, and keep the seller on the hook for anything the buyer fails to do.
Really dangerous stuff
People aren’t supposed to do this, but there have been incidents in which the leasing company declines the assumption but the parties just decide to do it anyway. That is a ridiculously dangerous situation for the seller.
Ewing shared a story of just how bad that can turn out: Premier had leased a Ferrari 575 to a Utah resident a few years back. When the economy turned bad, the client couldn’t afford the $2,000 monthly lease payments and looked for a way out. Premier, like all collector-car leasing companies, won’t consent to an assumption — a lease swap. Given the easy-out structure, they prefer to just write a new lease with the buyer. That wouldn’t work here, as selling the 575 wouldn’t bring enough to pay the balance due on the lease.
So the lessee found someone to “take over” the lease on the QT. To the buyer, it was an opportunity to drive a Ferrari 575 for $2,000 per month for as long as he wanted, so he adopted a “drive it like you stole it” attitude about it.
Soon, Ewing got a call from the Maryland police. The Ferrari had been involved in a high-speed chase and had been impounded. Premier was the legal owner, and the cops wanted to know who the lessee was.
The Utah lessee ended up on the hook for impound and storage fees, $10,000 in repair costs, and the full amount of the residual. Underwater before, he was now submerged even deeper, given the diminished condition and lower resale value of the Ferrari.
Does this make sense?
I’m pretty intrigued with leasing new and collector cars.
Take my E-type. I wrote a check to buy it. If I had leased it, I would have used only 20% of my cash, and I would still have the cash needed to fix it up. The payments aren’t very high. After several years, I could sell the car at a profit and pay off the lease. Of course, if I end up wanting to keep the car forever, I’m just paying interest on borrowed money, which I might even be able to borrow for less elsewhere.
A new-car lease is also interesting. I’ve never owned a BMW M3, but I would like to one day. I found a Swapalease listing for a 2012 M3 with 15 months remaining on its lease.
The lease payments are $1,021 per month, but the seller is offering to pay me $2,500 to bring the effective payments down to $854 per month, which is really a pretty painless way to “rent” an M3 and see if I like it. At the end of the lease, I can walk away with no regrets. Or I could buy the M3 for the $46,131 residual, sell it for more and keep the profit, reducing my cost even more. The seller’s listing ends with the words that are music to the ears of any car collector: “Make me an offer!”
Both of these easy opportunities to spend money could get me into real trouble! ♦
John Draneas is an attorney in Oregon. His comments are general in nature and are not intended to substitute for consultation with an attorney.