durstgt

I have a question about lease residuals. Is the residual value the price that the dealer can purchase the car for? The way that I understand it (which is likely wrong) is that MBFS takes the car back on lease return and can then sell it to the dealer at residual.

Let's consider the following example:

Assumptions
Original MSRP $68k
Original Residual 50%

In February of 2009, Joe leases C63 for 3 years with a 10k/mi yr lease. At this time, the residual value was 50%, and the MSRP was $68,000. It's now February of 2012, and Joe can buy the car out for $34,000, but he decides to upgrade to a SLS because he's one of the lucky few that had a decent 2011 bonus. Joe turns the car in and MBFS sells the car to MBofJoe'sTown for $34,000.

1. If this is the case, then shouldn't CPO prices (actual prices paid) be much lower on cars returned to the dealership where they are then being sold as CPO?
2. Also, if the residual is 34k and the auction price rate is 40k, why even bother recertifying for CPO?

I'm trying to figure out how to get the best deal possible on a C63, but to me it doesn't have to be zero sum. If my understanding of the way that lease returns is correct, I've got the patience to wait on a local lease return so that we'd be talking about
Clearly, one of my assumptions is wrong. Help me figure out which one.

Thanks.

rage2

The dealer is going to sell it at market value. If someone gives up their lease with a low buyout, they're giving the dealer money. Why would they sell it for less when they can make more money on it?

Your best bet to getting a good deal is buying out a lease return privately. They're hard to come by, because if I had a return at low residual, I'd just buy out the car and resell it to make some money.

Merc63

Buy private if you want to save money. No tax and usually a better deal..

Try find a guy that is going to trade it in and get raped at the dealer. He will be motivated to sell at a good price.

YYZ-E55

Comments:
1) Dealer does not have to buy a lease return. It's MBF's problem.
2) Dealer does not necessarily pay RV. They may pay less if MBF has determined that RV losses are high on that model (ie: dealers aren't buying at lease-end and the cars are going to auction and taking a beating), thus MBF will often adjust the dealer buy price downward to reflect market conditions/reduce auction losses.
3) Service profit (internal rate) is irrelevant. The dealer selling a used car is only concerned with his used vehicle P&L; service, parts and new car sales have their own P&L to worry about. Internal service work (reconditioning) is generally charged out at less than the customer pay door rate, but if service isn't making profit on recon work, why would they choose it over customer pay work at full profit?

The math looks more like this:
C63 at RV of $34,000 + reconditioning cost (assume some minor body damage, four tires, wheel repairs, service A or B, CPO cost, etc) $2,000-$4,000 + profit (0-10% depending on how long the car has been in inventory). Obviously the dealer also has to pay a commission to the sales guy; figure 20% of gross profit.

So $34,000 + $3,000 recon (conservative for a C63) + 5% GP = $38,850, and the sales guy is only getting $370 commission and now the used car department is making $1,480 assuming the car hasn't been on the lot for ages. If it has been around for 90+ days, the carrying cost of the car is huge and directly impacts the P&L.

durstgt

Thanks for the replies.

To confirm: dealers can purchase at or below RV.

It seems market is above the bottom-up price that YYZ laid out above. So since the dealer doesn't have to buy the car on lease return, that would imply that the only C63's going to auction from MBFS (that were lease returns) have some sort of problem that would prevent the dealer from selling them at market - right?

YYZ-E55

Exactly. Auction cars may have prior accident damage (if severe enough, the car cannot be CPO'ed), they missed a service (again, cannot be CPO'ed), too many miles, bad color combo, too many in stock, soft market for that particular model in local dealer area, etc, etc.

I should add to the math above - the longer the car sits, the greater the carrying cost to the used car department. So if you walk in and the car you're after has been on the lot for 5 days, there's not much incentive for the dealership to cut you a deal. After 90 days, it's a much different story.