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      01-27-2015, 10:22 PM   #1
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Thumbs up Leasing 101 / FAQ (BMW emphasis)

I am starting this thread in the hopes it helps those new to leasing. The emphasis is about what leasing really is, some of the terms, and its main components. If decent enough maybe the mods will make it a sticky and newbies can use it as a one stop info post/thread. Please feel free to comment and I will edit out whatever needs correction.

THIS IS NOT A LEASE VS BUY THREAD

Leasing in simple terms is paying for the amount of car you are using + interest and fees.
The financing company wants you to pay for the anticipated depreciation of the car and it also takes interest while this happens so they can make a profit.

Most leases are 2-4 years with 3 being the sweet spot. This is because the most depreciation happens in year one, making it unfriendly to the buyer and too many years makes it unattractive to the finance company to take back and unfriendly to the buyer who wants to change cars more frequently.

The main components of leasing are as follows.

MSRP- This is the amount on the window sticker and is used for the residual calculation.

Money factor- Basically a fancy way of saying interest rate. Whatever the money factor is, multiply by 2400 and that will tell you the interest rate. This number cans be manipulated and the dealer will not always disclose it, but if you want to make sure you aren't taken advantage of, you need this number. The money factor can change monthly.
Also BMW allows a dealer to mark up lease rates up to 0.0004. This may sound small but equates to 0.96% over the course of a lease and is pure dealer profit. Always find out the base money factor before you start negotiating lease terms.
Example
Lease factor should be in decimal form and should be a small number. Currently BMW is charging a 0.0013 lease rate for the F80/82/83.
.0013 x 2400 = 3.12%.
So the smaller the number the better.
ONE IMPORTANT MONEY FACTOR NOTE IS IF YOU ARE BUYING THE CAR VIA EUROPEAN DELIVERY, BMWFS AUTOMATICALLY ADDS 0.0003 TO THE BASE MONEY RATE. IN EXCHANGE THEY PAY ONE MONTHS PAYMENT WHILE THE CAR IS IN TRANSPORT. ITS A LOSING EQUATION FOR THE BUYER AS THE INTEREST RATE SURPASSES THE 1 MONTH PAYMENT.

Residual rate- Expressed as a percentage and varies by number of years, mileage, and model. It is based of the MSRP of the actual vehicle you are buying/ordering.This number can change every month. Obviously the more years and miles you add to the lease the lower the residual because the car won't be worth as much when you turn it in. Higher residual rates are obviously better.

***Please note there has been some misinformation from some CA's about the residual on a European delivery car. The residual is still based off of the US MSRP NOT the ED MSRP***


Example
MSRP is 50000
Residual of 50% means you will finance 25000 over the term of your lease
Residual of 60% means you finance 20000 over the term of the lease.

Cap cost- This is the price you have negotiated on the car. Yes that's right, you can negotiate the price on a leased car.

Cap cost reduction- This is any money used to reduce the total cap cost. It can be incentives, trade in, or cash. This is generally something to avoid because you lose that money if you total the car. Its also hard to recoup if you want to transfer the lease to someone else (no one wants to give you cash you spent to get your payment low). If a lower monthly payment is needed, makes you feel better, or gets it past the gatekeeper (aka spouse) then you are better of using MSDs (explained below) or taking the money and putting into a separate account. You then transfer a small amount over every month to make the payment lower.

Multiple Security Deposits (MSDs)- This is a BMW tool to bring down the money factor which in turn will reduce your monthly payment. It is returned at the end of the lease and is a good tool to lower your payment, but there are a few caveats.
1- You will not get it back if you fail to make good on your end of the lease (don't pay the monthly payment)
2- Again difficult to get someone to give you that money when transferring the lease.
3- End of lease charges are taken first before money is paid (damage, over mileage, etc.)
A maximum of 7 MSDs can be applied. Each one reduces the money factor 0.00007. Each MSD costs the monthly payment rounded up to the nearest $50.

Example

Original money factor is 0.0013
0.0013 x 2400 = 3.12
You buy 5 MSDs
0.0013 - (0.00007 x 5)= 0.00095
0.00095 x 2400 = 2.28

You reduced your interest rate from 3.12 to 2.28 with money you get back at the end of the lease.

Why does BMW do this?. Mostly because they can invest it and it gives them cash in hand to take for damage without having to chase after money at lease turn in.

Acquisition fee- Basically a loan origination fee. Right now base fee is $795 for BMW as of 1/1/2015 (can be raised to $995 max by dealer). Varies by manufacturer.

Disposition fee- BMW charges $350. Its a fee BMW charges so the dealer can "dispose" of the car (usually prepping/transporting for the next buyer). This fee is waived if you go into another lease or buy a new car through BMWFS, buy the currently leased car, transfer the lease, or sell it (you still need to pay BMWFS what you still owe them).

Taxes- This can differ from state to state and even within a state. Some states require the full purchase price be taxed up front, some counties within a state add an additional tax, and some states tax at a different rate for lease than buying. Check with your state as this topic is too broad to tackle in this post.

Now that we understand the terms, some quick tips.

Every leasing company has slightly different rules for the leases. You have to investigate them individually. For this section I will use BMW as the example.

BMW expects the car returned in the condition it was picked up. This means any mods must be reversible. Don't bolt on a wing to the trunk, paint the car a different color, change the interior material, etc. Mods like springs, wheels, grill changes are fine as long as you change it back when you turn it in. Some dealers will wok with you on this and will let you add OEM parts. As with anything, check first before modding. Some mods can be rolled into the lease if they are added during the original order (black grills for the M3/M4 is one example). Other mods can be sold after you turn the car in (ex. Bavsound speakers).

One special topic is tires. Most tires will need to be replaced before end of lease. You are allowed to by any tire as long as it is of the same rating/size/performance. If the car came with Pilot Super Sports, Bridgestone Potenza will be fine. IF YOUR CAR CAME WITH RUNFLATS IT HAS TO BE RETURNED WITH RUNFLATS. Many people forget this and get dinged at lease turn in. Tread depth must be 4/32" or greater.

BMW requires an lease end inspection that usually is setup up about 75 days from the lease maturity date. This is an independent company. When completed you will receive a report and it will detail any repairs that are needed. You can fix it or still just turn it in and be billed by BMW later.

Fees also vary by state but shouldn't be much different than buying a car. These fees include the usual doc fee, admin fee, title, etch. Watch for dummy fees. These can be paid upfront or rolled into the monthly cost. Its up to you to spot bogus or marked up fees. Spoke like to pay them upfront and not deal with the interest of them over three years. Some like to pay as little as possible at signing. Usually the rule of thumb is to pay these upfront because they most are mandatory and why pay interest on them if you don't have to.

BMW does provide the option to buy additional mileage before the lease ends. Its usually at a reduced rate compared to turn in, but higher than the mileage cost of adding it in at the beginning of the lease. You can crunch the numbers if you believe you will be in between mileage at lease end. Generally you want enough mileage so you aren't constantly looking for excuses not to drive it.
I am editing this slightly and adding some details about buying excess miles.

*BMWFS will refunded purchased miles you do not use, but they don't specify how much you are refunded.

*You can pay for extra miles in increments or in lump sum payment if buying them outside of 120 days of lease end.

*Within 120 days up to the day before lease maturity, you can buy miles in lump sum payment.

*Payment is subject to sales tax

*Miles are currently $0.16/mile before lease end compared to $0.20 after lease end. ($0.22 vs $0.25 for 7 series)

Be realistic with yourself about the mileage and its probably better to slightly underestimate than over, because the rebate on unused miles is embarrassingly low.

BMW financial also automatically includes GAP insurance. This is a nice touch because you don't need to get it yourself.

BMW provides a "ding-o-meter" which shows how much damage is acceptable. This makes it easy to get an idea if you are going to need to fix certain defects.

You are also allowed to return your BMW to any authorized dealer (likely any US dealer) but they usually need to be notified (about 90 days). You can't just show up at a random dealer and drop of the car without expecting a huge hassle.

BMW also makes it fairly painless to transfer a lease. This is nice because it reduces your financial exposure should you need to get out of the payments. It also makes it important to make a good deal as it will make your transfer more desirable. I will try and update some of the basics at a later date.

Another important tip. You are always allowed to buy out the lease or sell the car whenever you want. As long as BMWFS gets the money they are owed, they don't care. This can be helpful if the car is worth more than the residual. This can happen at any time and some dealers (esp BMW) will gladly take your lease early if the car is in demand. Many forum members have taken advantage of this little known fact to get into new cars sooner than their lease term. Also since you can drop off at any dealer, you could shop your car around to multiple dealers and see if anyone will buy for more than the residual.

Example
2013 M3 with a residual of 55% after 3 years (MSRP $75000) Buy out is $41,250. You go to turn the BMW in and ask if they want to buy it. They say yes and offer $43,000. You get $1,650 in cash or towards the next car.
This works prior to lease end, you just need to have them offer more than the current buy out.

Also look for smartphone apps or websites that will let you calculate lease prices. This lets you plug the numbers in right along with the dealer to make sure it all adds up properly. A quick search through Google Play Store or IPhone App Store will give you some choices. By having the program ready the dealer is less likely to mess around with your numbers, it takes some of the stress off of you (because you don't have to have every aspect memorized), and some apps let you save each deal individually for comparison.

So that is leasing in a nutshell.

If you want some one to rate your deal you will need to include MSRP, Negotiated price (cap cost), money factor, years, allowed mileage, cap cost reductions, number of MSDs, and monthly cost.
Please add comments/corrections/suggestions.

Special Section on lease transfers
BMW typically has one of the most painless lease transfer policies. Basically any lease further out than 6 months to maturity can be transferred. Exceptions are made for cars within 6 months. Also the lease must be current with no other liens/parking tickets/etch. The process usually takes about 4 weeks.

One huge point that must be made is when you transfer a lease with BMWFS they also transfer over responsibility to the new lessee. The original person leasing walks away free and clear. This is a big time perk.

First stage- The lessee needs to find a person willing to take it over. How they find said person is up to them. Many will use this forum, some other lease swapping sites. You could just ask family ,friends, or put an add in the paper.

Once you find a potential trading partner. You must notify BMWFS of you intention to transfer the lease and the assumer must submit a credit application with BMWFS along with $500. $100 is a nonrefundable credit application and $400 is the lease transfer fee (refunded if you fail the credit app.

If approved, both parties are sent paperwork to complete. Approval decision is completed in 48 hours or less. The current lease holder will not know the credit decision until the assumed lets them know. Remember this if you ever try and transfer a lease. It is key that whoever you are dealing with needs to be accessible. If you can't get in contact with them the prices can drag out or you could miss out on another candidate while you play telephone tag.

Second stage- BMWFS creates transfer documents within 1-2 days and sends them to each party. They must be completed and sent back with original signatures. Again one party dragging their feet really slows down the process. Also the vehicle must be added to the transferee's policy at this point.

Third stage- BMW mails out final paperwork to both parties. The transferor gets a confirmation letter that the process is complete and the transferee gets all the documents necessary to register the vehicle. At this point the parties meet and the car is exchanged. The transferor needs to remove their plate and cancel the registration.

The whole process takes about 3-4 weeks, but can be faster if both parties are diligent. If the entire process takes longer than. 60 days then the whole things goes back to square 1, including the fees.

Lease transfer while convenient, is one scenario where MSD's are not a great idea. Any MSD money is transferred over to the assumed. This is why you will see some try and recoup that money. Most times you have take the loss as assumes have no incentive to give you that money.

Thanks to M6-Coupe for this great lease cost breakdown
This is the formula that dealers use to calculate the lease payment:

If the residual value is "R" ; R = MSRP x Residual (%)
The Capital cost (sales price) is "C"
Money Factor is "MF"
Down payment is "D"
Lease term is "N" ; number of months (ie 36 or 39)
Monthly depreciation fee "MD" = (C-D-R)/N
Monthly lease fee "ML" = MF * (C-D+R)
Then the monthly lease payment= MD +ML + tax
Drive off : The upfront money including all other fees ( bank fee , acquisition fee, license fee, etc) + first month payment


For example.
MSRP =100k
Capital cost (sales price after 10k discount) = 90k
MF = 0.0013
Residual = 60% = 60k
lease term = 36 months
Down payment = 0
other fees = 2K
tax = 8%

MD = 30k/36 = 833.3
ML = 195
tax = %8 * (833.3 + 195) =82.2
monthly lease payment = 833.3 + 195 + 82.2 = 1110.5

Drive off = 2000 +1110.5 = 3110.5

Note: according to tax, this calculation is based on CA tax which is tax on lease cost. some states calculate the tax based on whole capital cost.
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      01-27-2015, 10:56 PM   #2
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Acquisition fee is $795
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      01-27-2015, 11:06 PM   #3
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Quote:
Originally Posted by kokopuffs405
Acquisition fee is $795
It's $725.
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      01-27-2015, 11:12 PM   #4
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Quote:
Originally Posted by MRCUR
Quote:
Originally Posted by kokopuffs405
Acquisition fee is $795
It's $725.
$795 as of January 1.
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      01-27-2015, 11:44 PM   #5
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Changed the acquisition fee and added some more detail.
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      01-28-2015, 01:05 AM   #6
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Excellent info. Thanks for taking the time to detail all this.
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      01-28-2015, 01:42 AM   #7
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Nice write up. Thanks.
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      01-28-2015, 02:12 AM   #8
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Should be a sticky. Good work.
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      01-28-2015, 02:25 AM   #9
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Sticky this!
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      01-28-2015, 02:36 AM   #10
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Real good post and very accurate, this will be very useful plain English for many!
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      01-28-2015, 08:36 AM   #11
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Is there any documentation on the acquisition fee being waived when coming out of a current BMW lease? This is the first time I've heard of it and would like to have "proof" to show the dealer.

Thanks
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      01-28-2015, 09:59 AM   #12
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Quote:
Originally Posted by monagram View Post
Is there any documentation on the acquisition fee being waived when coming out of a current BMW lease? This is the first time I've heard of it and would like to have "proof" to show the dealer.

Thanks
Sorry I think I made an error. The acquisition fee stands but the disposition fee is waived ($350). Will make the change.
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      01-28-2015, 10:01 AM   #13
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Quote:
Originally Posted by OneRib
Quote:
Originally Posted by monagram View Post
Is there any documentation on the acquisition fee being waived when coming out of a current BMW lease? This is the first time I've heard of it and would like to have "proof" to show the dealer.

Thanks
Sorry I think I made an error. The acquisition fee stands but the disposition fee is waived ($350). Will make the change.
That's correct. The disposition fee is waived but you'll pay another acquisition fee.
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      01-28-2015, 10:38 AM   #14
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Thanks, had a feeling that was it.
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      01-28-2015, 12:10 PM   #15
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Quote:
Originally Posted by OneRib View Post
I am starting this thread in the hopes it helps those new to leasing. The emphasis is about what leasing really is, some of the terms, and its main components. If decent enough maybe the mods will make it a sticky and newbies can use it as a one stop info post/thread. Please feel free to comment and I will edit out whatever needs correction.

THIS IS NOT A LEASE VS BUY THREAD

Leasing in simple terms is paying for the amount of car you are using + interest and fees.
The financing company wants you to pay for the anticipated depreciation of the car and it also takes interest while this happens so they can make a profit.

Most leases are 2-4 years with 3 being the sweet spot. This is because the most depreciation happens in year one, making it unfriendly to the buyer and too many years makes it unattractive to the finance company to take back and unfriendly to the buyer who wants to change cars more frequently.

The main components of leasing are as follows.

MSRP- This is the amount on the window sticker and is used for the residual calculation.

Money factor- Basically a fancy way of saying interest rate. Whatever the money factor is, multiply by 2400 and that will tell you the interest rate. This number cans be manipulated and the dealer will not always disclose it, but if you want to make sure you aren't taken advantage of, you need this number. The money factor can change monthly.
Also BMW allows a dealer to mark up lease rates up to 0.0004. This may sound small but equates to 0.96% over the course of a lease and is pure dealer profit. Always find out the base money factor before you start negotiating lease terms.
Example
Lease factor should be in decimal form and should be a small number. Currently BMW is charging a 0.0013 lease rate for the F80/82/83.
.0013 x 2400 = 3.12%.
So the smaller the number the better.
ONE IMPORTANT MONEY FACTOR NOTE IS IF YOU ARE BUYING THE CAR VIA EUROPEAN DELIVERY, BMWFS AUTOMATICALLY ADDS 0.0003 TO THE BASE MONEY RATE. IN EXCHANGE THEY PAY ONE MONTHS PAYMENT WHILE THE CAR IS IN TRANSPORT. ITS A LOSING EQUATION FOR THE BUYER AS THE INTEREST RATE SURPASSES THE 1 MONTH PAYMENT.

Residual rate- Expressed as a percentage and varies by number of years, mileage, and model. This number can change every month. Obviously the more years and miles you add to the lease the lower the residual because the car won't be worth as much when you turn it in. Higher residual rates are obviously better.

Example
MSRP is 50000
Residual of 50% means you will finance 25000 over the term of your lease
Residual of 60% means you finance 20000 over the term of the lease.

Cap cost- This is the price you have negotiated on the car. Yes that's right, you can negotiate the price on a leased car.

Cap cost reduction- This is any money used to reduce the total cap cost. It can be incentives, trade in, or cash. This is generally something to avoid because you lose that money if you total the car. Its also hard to recoup if you want to transfer the lease to someone else (no one wants to give you cash you spent to get your payment low). If a lower monthly payment is needed, makes you feel better, or gets it past the gatekeeper (aka spouse) then you are better of using MSDs (explained below) or taking the money and putting into a separate account. You then transfer a small amount over every month to make the payment lower.

Multiple Security Deposits (MSDs)- This is a BMW tool to bring down the money factor which in turn will reduce your monthly payment. It is returned at the end of the lease and is a good tool to lower your payment, but there are a few caveats.
1- You will not get it back if you fail to make good on your end of the lease (don't pay the monthly payment)
2- Again difficult to get someone to give you that money when transferring the lease.
3- End of lease charges are taken first before money is paid (damage, over mileage, etc.)
A maximum of 7 MSDs can be applied. Each one reduces the money factor 0.00007. Each MSD costs the monthly payment rounded up to the nearest $50.

Example

Original money factor is 0.0013
0.0013 x 2400 = 3.12
You buy 5 MSDs
0.0013 - (0.00007 x 5)= 0.00095
0.00095 x 2400 = 2.28

You reduced your interest rate from 3.12 to 2.28 with money you get back at the end of the lease.

Why does BMW do this?. Mostly because they can invest it and it gives them cash in hand to take for damage without having to chase after money at lease turn in.

Acquisition fee- Basically a loan origination fee. Right now base fee is $795 for BMW as of 1/1/2015 (can be raised to $995 max by dealer). Varies by manufacturer.

Disposition fee- BMW charges $350. Its a fee BMW charges so the dealer can "dispose" of the car (usually prepping/transporting for the next buyer). This fee is waived if you go into another lease or buy a new car through BMWFS, buy the currently leased car, transfer the lease, or sell it (you still need to pay BMWFS what you still owe them).

Taxes- This can differ from state to state and even within a state. Some states require the full purchase price be taxed up front, some counties within a state add an additional tax, and some states tax at a different rate for lease than buying. Check with your state as this topic is too broad to tackle in this post.

Now that we understand the terms, some quick tips.

Every leasing company has slightly different rules for the leases. You have to investigate them individually. For this section I will use BMW as the example.

BMW expects the car returned in the condition it was picked up. This means any mods must be reversible. Don't bolt on a wing to the trunk, paint the car a different color, change the interior material, etc. Mods like springs, wheels, grill changes are fine as long as you change it back when you turn it in. Some dealers will wok with you on this and will let you add OEM parts. As with anything, check first before modding. Some mods can be rolled into the lease if they are added during the original order (black grills for the M3/M4 is one example). Other mods can be sold after you turn the car in (ex. Bavsound speakers).

One special topic is tires. Most tires will need to be replaced before end of lease. You are allowed to by any tire as long as it is of the same rating/size/performance. If the car came with Pilot Super Sports, Bridgestone Potenza will be fine. IF YOUR CAR CAME WITH RUNFLATS IT HAS TO BE RETURNED WITH RUNFLATS. Many people forget this and get dinged at lease turn in. Tread depth must be 4/32" or greater.

BMW requires an lease end inspection that usually is setup up about 75 days from the lease maturity date. This is an independent company. When completed you will receive a report and it will detail any repairs that are needed. You can fix it or still just turn it in and be billed by BMW later.

Fees also vary by state but shouldn't be much different than buying a car. These fees include the usual doc fee, admin fee, title, etch. Watch for dummy fees. These can be paid upfront or rolled into the monthly cost. Its up to you to spot bogus or marked up fees. Spoke like to pay them upfront and not deal with the interest of them over three years. Some like to pay as little as possible at signing. Usually the rule of thumb is to pay these upfront because they most are mandatory and why pay interest on them if you don't have to.

BMW does provide the option to buy additional mileage before the lease ends. Its usually at a reduced rate compared to turn in, but higher than the mileage cost of adding it in at the beginning of the lease. You can crunch the numbers if you believe you will be in between mileage at lease end. Generally you want enough mileage so you aren't constantly looking for excuses not to drive it.

Be realistic with yourself about the mileage and its probably better to slightly underestimate than over, because the rebate on unused miles is embarrassingly low.

BMW financial also automatically includes GAP insurance. This is a nice touch because you don't need to get it yourself.

BMW provides a "ding-o-meter" which shows how much damage is acceptable. This makes it easy to get an idea if you are going to need to fix certain defects.

You are also allowed to return your BMW to any authorized dealer (likely any US dealer) but they usually need to be notified (about 90 days). You can't just show up at a random dealer and drop of the car without expecting a huge hassle.

BMW also makes it fairly painless to transfer a lease. This is nice because it reduces your financial exposure should you need to get out of the payments. It also makes it important to make a good deal as it will make your transfer more desirable. I will try and update some of the basics at a later date.

Another important tip. You are always allowed to buy out the lease or sell the car whenever you want. As long as BMWFS gets the money they are owed, they don't care. This can be helpful if the car is worth more than the residual. This can happen at any time and some dealers (esp BMW) will gladly take your lease early if the car is in demand. Many forum members have taken advantage of this little known fact to get into new cars sooner than their lease term. Also since you can drop off at any dealer, you could shop your car around to multiple dealers and see if anyone will buy for more than the residual.

Example
2013 M3 with a residual of 55% after 3 years (MSRP $75000) Buy out is $41,250. You go to turn the BMW in and ask if they want to buy it. They say yes and offer $43,000. You get $1,650 in cash or towards the next car.
This works prior to lease end, you just need to have them offer more than the current buy out.


So that is leasing in a nutshell.
If you want some one to rate your deal you will need to include MSRP, Negotiated price (cap cost), money factor, years, allowed mileage, cap cost reductions, number of MSDs, and monthly cost.
Please add comments/corrections/suggestions.
great post... thank you for the info!! MODS make this a sticky
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      01-28-2015, 05:19 PM   #16
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Great Post... Thx!
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      01-29-2015, 12:33 AM   #17
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Question on the last paragraph, why would a BMW dealer buy it for over the buy out amount? Don't they get it for less from BMW? Isn't that how they can negotiate the buy out to lower than the residual amount?
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      01-29-2015, 12:38 AM   #18
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Quote:
Originally Posted by boi222 View Post
Question on the last paragraph, why would a BMW dealer buy it for over the buy out amount? Don't they get it for less from BMW? Isn't that how they can negotiate the buy out to lower than the residual amount?
The dealer doesn't own the car when you turn it in BMWFS does and they get to do what they want from it. So if your car is worth more to the dealer than what is owed; they will want to buy it from you. They will get a better deal from you than BMWFS.

It doesn't always work out like this, it depends on the situation. You may be turning in a popular vehicle like an X5 and its got popular options, color, and mileage. If the dealer is short on used X5's, they will be aggressive about getting yours. Sometimes even to the point of asking for it early. If you decide to buy another BMW from them, its a double dip win for the dealer.
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      01-29-2015, 01:31 AM   #19
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What great Info!
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      01-29-2015, 01:41 PM   #20
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Thanks everyone for the well received input and compliments.

I made an addition to the original post. I talked a little about apps or programs for calculating leases.
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      01-29-2015, 04:05 PM   #21
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Thanks OP! Very thorough.
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      01-29-2015, 04:43 PM   #22
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I just learned a lot, thanks OP for doing this!
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