Shocked by declining values

[butundo]

Originally Posted by TwinsPoppa

Regardless, I guess the auto industry is losing out when it comes to leases. If they say the residual is high (in this market), then they may be stuck with an overvalued vehicle.

If they say the residual is low, then the customers are not gonna sign up because their payments will be higher.

Right, but why isn't the payments lower on these vehicles? The way leases were designed, you are making monthly payments on the difference of the selling price, minus the residual. If a car has a high residual percentage, the car should be cheaper to lease, but with high end cars, that is not the case. I used to sell cars back in 1993. Leases were the highest money maker for the dealers. Usually $2-2.5k profit per lease. What most people don't realize is that you can negotiate a lease payment. Always ask what is the selling price of the vehicle that determined the lease payment. They do have to tell you, but most will try to give you some bs story. Since the residual value is already determined, if you negotiate a lower selling price, it will lower the lease payment. Plus, most dealers require $2-4K down, which also needs to be deducted from the selling price.

[TwinsPoppa]

Originally Posted by butundo

Right, but why isn't the payments lower on these vehicles? The way leases were designed, you are making monthly payments on the difference of the selling price, minus the residual. If a car has a high residual percentage, the car should be cheaper to lease, but with high end cars, that is not the case. ...

And THAT'S what I want to know.

Why aren't the payments lower and why is that the case. I guess the current economy is not affecting high end dealers.

[E61Silver]

Originally Posted by TwinsPoppa

And THAT'S what I want to know.

Why aren't the payments lower and why is that the case. I guess the current economy is not affecting high end dealers.

1)Generally speaking a BMW retains value and has a higher residual value.
For example a Caddy generally cost a lot to lease because the residual value is low.

2) I don't think high end foreign car makers and dealers are reducing prices like the us manufactures. The dealer can only go so low and I think they all work together. In the end if my BMW costs $1,000 more or less its not going to stop or make me buy.

[JCL]

Originally Posted by butundo

The way leases were designed, you are making monthly payments on the difference of the selling price, minus the residual. If a car has a high residual percentage, the car should be cheaper to lease, but with high end cars, that is not the case.

I wouldn't say that is completely true.

eg: 100 k vehicle, 60 k residual value

You are 'paying off' the 40 k depreciation, over the term of the lease. That is just as you stated.

However, you are also paying the opportunity cost, or carrying cost, which is the financing on the total (declining) value, over the lease term.

If two cars have the same price, and one has a higher residual value, then yes, it would be cheaper to lease than the other car (all other things being equal).

However, expensive cars have higher carrying costs, so more expensive (high end) cars shouldn't be cheaper to lease just because they may have higher residual values than less high end cars. Add in the risk factor due to the volatility in the resale market, and more expensive cars will not be great deals just because of presumed good residuals, you need to look at the total equation.

[butundo]

Originally Posted by JCL

However, you are also paying the opportunity cost, or carrying cost, which is the financing on the total (declining) value, over the lease term.

Yes you are correct. I believe that is where the term "money factor" is thrown around when leasing. It is just the financing costs as you stated. But isn't BMW currently offering some really low rates? I would think that should apply to leases as well. It all depends on the leasing company. Does BMW do their own leases? When I worked for Honda, we used different leasing company's, just as people use different banks for financing.