When you lease a vehicle, you never really own it — the dealer does. So you might think that you have no equity in the vehicle.
But you’d be wrong.
In fact, if you are currently leasing a car, even if you are just a year in and have several years to go, you might be able to get out of the lease and walk away with several thousand dollars.
So how is this possible?
An auto shortage means higher prices for used cars
The fallout from COVID-19 continues to cause supply chain shortages in multiple industries. With steel and computer chip shortages, the automotive industry has not been immune.
That means fewer new cars rolling off assembly lines and thus a larger demand for used cars. The problem? Dealerships cannot keep up with this demand.
Megan Stewart of Cincinnati recently purchased a new Toyota RAV4, but the dealer was so desperate for used cars, there was an unusual stipulation to the deal.
“When I went to buy a new RAV4, the dealership would only make a deal if I agreed to trade in my 2015 Honda Civic,” Stewart says. “They said they couldn’t handle the loss of a single vehicle on their lot, given the major shortages going on.”
And that’s no isolated incident. In January 2019, there were just under 3 million used cars available in the U.S. And earlier this fall? It was down to 2.3 million for a loss of nearly 33 percent.
To put it bluntly, “dealers are hurting for inventory,” says Kyle Johnson, senior editor for The News Wheel.
To make up for the massive deficit of used cars, dealerships have resorted to emailing lessees with whom they are currently under contract, offering to end the lease early and pay a pretty sum for a buyout. San Francisco’s ABC 7 told a story of a woman offered $6,000 to end her lease early.
How to make money off your leased car
The amount of money you pay for a leased vehicle over the duration of the contract is typically the difference between the car’s initial value and the estimated residual value at the end of the lease term. In that sense, you are merely renting a vehicle from a dealership, and at the end of the contract, the dealership intends to sell the vehicle as a used model.
But what’s happening right now is that leased vehicles are worth considerably more than they were originally estimated to be at the end of their terms. As a lessee, even though you don’t own the vehicle, you hold all the power because that increased equity belongs to you … if you handle the end of the lease strategically.
According to Cars Direct, the top five selling cars of 2018 are being sold used for 40 percent more than what would have been expected pre-pandemic. For example, a 2018 Nissan Altima has a nearly 50 percent market value increase, which translates to a more than $6,000 jump. Think about that if you are turning in a 2018 Altima this year.
The No. 1 advice we can give: If you are currently leasing a car, do not just turn it in at the end of a lease as originally planned.
You will be leaving money on the table if you do. Instead, explore one of these options for making money off your leased car:
1. Sell the lease to a third party
An option that lessees have long exercised during their leases has been selling their leases to a third party, like Carvana, Vroom or CarMax. For example, you could take your leased 2020 Honda Pilot and sell the vehicle — lease agreement and all — to CarMax. You’d immediately stop making payments, and you’d have a nice check if the vehicle was able to fetch enough money to cover the rest of your payments and then some.
And because of the huge demand for used cars, your lease vehicle should easily be able to command a large amount of that “and then some” cash when you sell it to a third party.
However, directly in response to the used car shortage, many lenders (branches of the automakers themselves) have begun to put a stop to this, legally prohibiting lessees from selling their contracts to third parties. Instead, they either have to return the vehicle to the dealership or buy it from the dealership at the end of the lease.
As of right now, Leasehackr is reporting that the following lenders are prohibiting third-party lease sales:
- Acura Financial Services
- BMW Financial Services
- Ford Credit
- GM Financial
- Honda Financial Services
- INFINITI Financial Services
- Lincoln Automotive Financial Services
- Mercedes-Benz Financial Services
- MINI Financial Services
- Nissan Motor Acceptance CompNY
- Southeast Toyota Finance
- Volvo Car Financial Services
- Tesla Finance
We expect this list to grow as the used car shortage continues.
2. Buy the car and sell it
Don’t let automakers have the final say. An easy enough way around the prohibited third-party lease sales is to simply buy the car from the dealership at the end of your lease and then turn around and sell it to whomever you want.
In fact, this gives you more earning potential. Once you own the car, you can see what CarMax or Carvana will pay for it, but you can also try to sell it privately for even more money.
To determine how much your vehicle is worth, try out Kelley Blue Book, which can estimate the value of your car based on model, year, features and condition. You can also check out dealer websites to see how much similar vehicles are selling for.
The beauty of buying the leased vehicle from the dealer at the end of your lease is that they can’t jack up the price. Check your lease agreement for the lease buyout wording; in it, the dealership should have spelled out exactly what you will pay to buy the car from them. This is called the guaranteed purchase option price.
A word of caution: You will need to pay sales tax and title fees when purchasing the leased vehicle, and if you can’t immediately sell the car, you need to be okay with the money you spent to buy out the lease being unavailable until the vehicle sells.
A second word of caution: This strategy applies to a lease buyout at the end of a lease contract. Early buyouts typically do not have guaranteed purchase option prices, meaning the dealer can charge you more for the vehicle. There may also be an early buyout fee.
3. Sell the lease back to the dealer
If you’re fortunate, you may not have to do much work at all. Don’t scoff when your dealer calls asking to buy you out of a lease early. Take a look at the offer, calculate what you think you could make trying to sell the vehicle on your own and determine if just simply selling the lease to the dealer is the right move.
Chances are good you may leave a little money on the table this way, but it’s certainly much less of a hassle to just sell to the dealer than buying the vehicle and selling privately.
Alternatively, you could try other nearby dealerships that sell vehicles of the same make. They may offer you more than the dealer from which you leased the vehicle. That’s the beauty of driving a leased vehicle in this shortage; you have the power to start a potential bidding war.
“Prices are way up,” confirms Johnson. “That car you leased a while back could actually net you a nice profit if you find a dealership that wants to come to the table and strike a deal with you.”
What to consider before selling your leased car
Now is a great opportunity to make some quick and serious cash by selling your lease. But before you sign on the dotted line, consider a couple of caveats:
You may be without a car
If you are not part of a multicar family and do not have access to affordable and efficient public transportation, getting rid of your vehicle may not be the right move.
New and used vehicle prices are at record highs
If you do sell and need to replace the vehicle with something new, be ready to pay those premium prices that you were charging when selling your lease. What goes around comes around.
In fact, some experts say that taking advantage of dealership incentives for ending leases is a bad idea for this very reason. “My recommendation would be: don’t do it,” says Kyle MacDonald, Director of Operations at Force by Mojio. “No matter how much you can earn in the moment, with the state of the market right now, there’s no guarantee you’d be able to find a replacement easily.”
MacDonald does offer one exception: “If you’ve already locked down a new car to purchase, in that case, ending a lease a month or two early may be worth the cash incentive.”
You leased that car because you liked it
Finally, consider if you’re ready to part with the car. At the end of the day, you work hard for a paycheck that affords you nice things. If a car to you is just a way to get from point A to point B and you couldn’t care less what make and model you’re sitting in, sure, end the lease.
Timothy Moore covers bank accounts for The Penny Hoarder from his home base in Cincinnati.
The rent roll market is a hot one, with demand far exceeding supply. So, whether you’re looking to buy or sell a rent roll, you better have your ducks in a row, says legal strategist and founder of O*NO Legal, Kristen Porter.
When it comes to both buying and selling rent rolls, there’s a lot more to consider than many people realise.
If you’re in the market to buy, you’ll have stiff competition, with the number of buyers surpassing the number of rent rolls available for sale.
That doesn’t mean you shouldn’t enter the market though, but if you do, there are four main factors to consider before taking the leap.
The multiplier
The multiplier is the magic number that determines the value of the rent roll. It’s the number you’ll multiply by the gross annual management fees to get your purchase price.
There are a few factors that determine the multiplier, which usually hovers between two and four. These include:
- Averages of annual rents and management income·
- Management term left to run on the management agreements and the authority given to the agent
- Portfolio location and desirability
- The number of landlords versus the number of properties under management
- How close the relationship is between the vendor and their landlords and whether there are special circumstances
- Property types and condition
- Systems, such as how the collection of rent and other management tasks are performed.
The retention
The retention period and retention amount are hotly negotiated elements of the rent roll sales process.
When you’re buying a rent roll, you’re essentially trying to buy the relationships already established between the agent and their landlords.
But this isn’t always smooth sailing, and some landlords will be spooked by the change and jump ship.
This is known as lost managements. The retention clauses address this by putting in place a mechanism where the buyer receives a refund for lost managements.
So, if you lose managements within the retention period, you will be refunded part of the purchase price – up to the value of the retention amount.
When negotiating the retention, it’s critical that you understand the current market.
For example, 12 months ago, the retention amount varied between five and 20 per cent of the purchase price. Now, it’s more like 10 to 40 per cent. The retention period is likely to fall somewhere between three and 12 months.
The restraint of trade
Again, this goes back to relationships. Your clients might not want to jump ship, but if they’re approached by someone they’ve already established a relationship with, they might be tempted.
To prevent this from happening, you need to ensure the vendor won’t compete against you and attempt to steal their former clients back after the deal is done.
This is done via a restraint of trade clause as part of the sales contract.
These usually vary between three and five years, but will depend on a few things, such as price, and whether the clause is limited to stealing clients or prevents them from working entirely.
Lots of factors come into play and that’s why it’s hotly negotiated!
Due diligence
It might seem like a tedious task, but it’s absolutely vital that you do your due diligence to ensure the vendor’s claims – which determine the multiplier, and therefore the sale price – are true.
It is time consuming, but without it, you could be in for a world of problems down the track, not to mention the possibility of overpaying for your rent roll.
Just like you wouldn’t buy a second-hand car without having a mechanic look over it first, or purchase a home without a building and pest report, you should never buy a rent roll without being absolutely sure everything is as you expect it to be.
Due diligence is what determines the outcome of the first three steps so it’s critical to get specialised advice, be that from a real estate agency lawyer or a property management consultant.
We had a client who came to us to ‘quickly look over the contract’ as they were ready to sign it. It turned out, the seller’s lawyers had been telling the buyer it was a standard deal, but we found some ‘nasties’ in there and recommended a full review.
That review saved them 30 per cent of the price simply by tightening up what constitutes a lost management, as well as securing a longer retention period to ensure more lost managements were captured and refunded to the buyer.
Selling a rent roll
To get the best price possible for your rent roll, you need to start the ball rolling as soon as possible.
There are four key areas you need to look at to get the most bang for your buck.
Get a higher multiplier (and sale price)
To achieve the highest possible price, you need to analyse and address all the issues that impact the multiplier, such as relationships, location, property conditions, current systems, and annual rent/income amounts.
If you want to bring your multiplier higher, you’ll need to have been working on this for a year or two before you sell. The last thing you want is to agree on a multiplier, only to have the buyer’s due diligence reveal a mess.
Management agreements
Your management agreements with your landlords are your biggest asset and are the foundation for the valuation of your rent roll.
If you assign these over in the wrong way, not only is your sale income at risk, but you’ll have the bank breathing down your neck.
Agency agreements need to be easily assignable, but they must comply with the legislation, which differs from state to state.
In most states, the management agreements can’t be assigned at all under legislation, and new management agreements must be entered into between the buyer and each landlord.
Hot tip: selling shares in the company rather than selling the rent roll as a business asset, will assist with lost managements.
In most states, if you just sell the rent roll then you need to get a new management agreement signed with each landlord.
If your management agreement is structured correctly, when you sell the shares in the company, you do not require the landlord’s approval or even their signature.
Biggest isn’t always best
A good sale isn’t just about getting the highest price. Selling to someone who won’t look after the business’ clients to the end of the retention period will lose you more than you gained by taking a higher offer.
Put simply, steer clear of buyers with a bad reputation.
Lost managements
Lost managements which occur during the retention period result in seller refunds, so the fewer clients who flee, the better for everyone.
Assisting in the transition process will reduce the number of lost managements, and therefore the number of refunds you have to pay.
We were acting on a matter where the vendor refused to call each landlord before sending them a written notice of the sale, instead opting for a generic email – despite our advice to the contrary.
The reason the seller didn’t want to make the calls is ‘there are too many calls to make’. It might seem like a lot of work, but by not making the calls, or even dealing with inquiries as they came in, that seller lost 25 per cent of the value of their rent roll in refunds – the owners went elsewhere.
So, remember, no matter how much you know about real estate, when it comes to buying and selling rent rolls, professional advice is a must.
At the end of the day, those tedious jobs that might seem inconsequential and time consuming, can cost – or save – you a lot of money in the long run.