Your Auto: Answering the Buy-or-lease Question

June 1, 1999

More car, less money--it's hard to argue with that combination. That's why more real estate practitioners are deciding to lease rather than buy.

At first glance, leasing would appear to be a no-brainer. Consider the popular Ford Taurus. A typical three-year lease can shave your monthly payment by $100 or more. And there are tax benefits, too, if you use your car for your real estate business. No wonder lease customers load up on options and trade in more frequently.

But whether you buy or lease isn't an entirely mathematical formula. It also depends on lifestyle and emotional factors.

When you buy a car, it's yours to keep at the end of the 36-, 48-, or 60-month loan. With a lease, what you're paying each month covers only the car's depreciation and interest on the part of the vehicle you're going to "use up" during the time it's in your possession. When the contract comes to an end, usually after 24 or 36 months, you hand back the keys and walk away. You have no equity and nothing to trade in. And just as it's true of renting a house, so it is with leasing a car--the payments never end.

Many motorists find that hard to handle. They like to feel they own their car, that once the payment coupons are gone, they can keep driving it as long as they want to, says Art Spinella, a leasing analyst with CNW Marketing Research, Bandon, Ore.

Of course, that sense of ownership can be a bit of an illusion, Spinella stresses. A sizable share of the folk who buy wind up trading in long before the last payment is due. And on a 60-month loan, you're likely to be "upside down" until very near the end of the contract. In other words, you still owe more than your vehicle will bring as a trade-in.

Why real estate pros lease

There are compelling reasons to consider leasing, suggests Mike Kranitz, Denver, author of Look Before You Lease and webmaster of the comprehensive Internet leasing site LeaseSource (www.leasesource.com)

Indeed, according to Simmons Market Research, the number of leasers in the real estate industry is inching up--from 16 percent in 1997 to 18 percent this year. "I've been in real estate 20 years but just started leasing a little more than a year ago," says Chandra Sefton, a broker-associate with RE/MAX Showcase in Gurnee, Ill.

The advantages boil down to image and finances.

"The appearance of your car may make a difference in the way you're perceived by customers. So you're likely to buy a new car every two or three years anyway," says Kranitz.

And there are tax advantages to leasing, he emphasizes, something that's important to self-employed real estate practitioners. "You can expense the percentage you use for business, up to the entire payment," he explains, "whereas when you buy a car, you can deduct only a limited amount of the depreciation," based on a schedule set by the IRS. The rules for expensing lease payments apply regardless of the type of car--no matter whether it's a Taurus or a Mercedes, says Kranitz. So the more expensive the automobile, the bigger the tax advantage of leasing.

There's a potential downside, however, if you rack up a lot of business miles on your auto.

The traditional leasing rule of thumb is that "if you're going to put a massive amount of miles on your vehicle each year, it doesn't necessarily make sense to lease," says Rod Couts, executive director of the National Vehicle Leasing Association, San Francisco. Couts says the typical lease allows you to drive up to 15,000 miles a year. Beyond that, you'll pay a penalty for every extra mile.

But even that hard rule is softening. Most lease contracts allow you to "buy" extra miles at a discount up front. Obviously, it pays to have a good sense of how much mileage you'll put on each year. And check the details of the contract. Some leases let you get some of your money back if you prepurchased more miles than you wind up driving.

Victoria Burns,CRS®, GRI, has done the math, and leasing doesn't make sense for her.

"I'm driving into the mountains--showing rural properties," says Burns, who's a tax practitioner as well as a real estate professional with Brass Key Realty in Craig, Colo. "Taking the mileage deduction or depreciating and taking expenses has always worked out better for me financially."

Look before you lease

If some of the leases you see look too good to be true, they may be in a sense. In recent years, manufacturers have subsidized leases to prop up sluggish model lines. But that's meant inflating residual values--what the lender expects the trade-in value to be when you return the car. And, in turn, manufacturers have run up big losses on their lease programs. So many makers, including Mercedes and Lexus, have trimmed back on lease subsidies. But deals are still out there if you're willing to look.

A tip for leasers: It pays to pick a car that's not only popular now but also likely to find a strong market when you bring it back at lease end. The higher the resale, the bigger the residual, and the lower your monthly payment. For that reason, leases can seem counterintuitive at times. Forgo air-conditioning, a cassette stereo, or power windows, and you might actually raise your monthly payment, since stripped-down cars aren't as easy to resell.

Some potential lease customers find themselves scared off by obscure-sounding terms--capitalized cost reduction, inception fees, andresidual value, for example--that lease contracts can be loaded down with. But things have become decidedly more customer friendly as a result of recent federal regulatory changes that keep lease contracts shorter and simpler.

"In past years, people in my office who leased had all kinds of problems with the lease agreements. Now federal regulations have simplified the process," says Sefton, who has a three-year lease on a Toyota Avalon. "Still, if you're going to do it, you have to get into the whole lease agreement and study the terms."

There are many ways that lenders can nail an unwary customer. Some charge lease inception fees, payments required up front simply for putting you into a car. Those are rare these days, but far more routine are back-end charges that come due when you turn the vehicle in.

You may be asked for a disposal fee. Essentially, you're paying the dealer to clean the car up and resell it. And don't overlook the excess-wear-and-tear clause. What constitutes excess wear? The definition seems to be in the eye of the beholder, and that's the problem. One company may penalize you for chipped paint, whereas another will ignore a baseball-size dent. Lenders are under pressure to standardize policies, but it's best to get the rules in writing.

"Don't think a lease is an excuse to run your car into the ground," warns Kranitz. You're expected to follow the manufacturer's routine maintenance schedule. That means oil changes, tune-ups, filters, and other normal repairs. Skip them, and you could pay a hefty penalty at the end of the lease.

Changing your mind comes with a price

So you've negotiated a bargain on your lease. But as the time approaches to turn the vehicle in, you decide you want to keep it. Should you?

"No," says Spinella, "you should have bought it in the first place." With rare exception, it'll cost you more in the long run to lease and then buy, he argues.

Most lease agreements contain a purchase option clause. Some contracts spell out a formula, basing the purchase price on the vehicle's going market rate. With other agreements, the price is fixed up front, at or near the vehicle's projected residual. Some contracts offer you an option to pay a small fee up front and get a lower purchase price if you decide to keep the car. If you don't keep it, though, you're out the up-front cash.

If you're intent on keeping your leased vehicle past the lease period, start by checking the newspaper. See what you'd pay to buy it from a local dealer. Or, check the many Internet sites that list used-car prices. On subsidized leases, you may get a better deal turning your car in. Then again, if you have an especially hot product, it may be worth more than anticipated.

That's what happened to Mike Burch, a financial analyst from Boston. At the end of the lease, he had an option to buy his BMW 325i for $12,000. He opened the Sunday classifieds and found the same car was going for $15,000. So he bought it, resold it, and pocketed the difference.

What if you want to get out of your lease ahead of schedule? That can be a costly dilemma, as a real estate practitioner from suburban Philadelphia discovered when his wife died. Only a year into the lease on her sport utility vehicle, he wound up paying $3,500 in penalties written into the contract's early termination clause. It's possible, in some instances, to transfer a lease, but lenders frown on that practice.

Lease or buy? The bottom line is that if you'd like to get a new car every two to three years, want to get the maximum car for a minimal investment, and don't mind the fact that you'll always be making monthly payments, then a lease is the right deal for you. If you feel the need of ownership or like to hang on to your car for a long time, you may be better off buying.

Whichever option is better, go into the dealer with your eyes wide open. Be willing to negotiate and check the fine print. It could save you a lot of money.

Everything’s Negotiable

Whether you buy or lease, just about everything in the contract is negotiable--even the length of the agreement. If you think a three-year lease contract is too long, says Art Spinella, a leasing analyst with CNW Marketing Research, Bandon, Ore., try a two-year lease, or even one for 18 months.

Be aware, too, that you have the right to choose your own lender--no matter who the dealer might prefer.

"Dealers often have incentives to promote one lender over another," notes Kranitz. The dealer may get a bonus for steering business to a particular bank. But just because the dealer gets a good deal, it doesn't mean you will, so ask around.

If you're looking for a subsidized lease, though, you're more likely to get it from one of the so-called captive finance subsidiaries, such as Ford Motor Credit or GMAC.

Paul A. Eisenstein is publisher of The Detroit Bureau. He has more than 30 years of experience covering the auto industry for a broad range of print, broadcast, and electronic media.

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