JTK44

The lease on my 2019 E450 ends in December. The car has 22,000 miles and is in excellent condition. The residual or buyback is $41,000. KBB.com has the trade in value of my car at $49,500. On Cars.com I see similar cars priced between $53,000 and $57,000 (asking).

Mercedes Benz Financial is willing to extend my lease, at the current monthly payment until March. The warranty on my car does not end until December 2022.

I realize that I can buy my car and pay tax which brings my cost to $45,000. I could then take my car and use the equity in it, about $5,000 as a cap cost reduction on a lease on a 2022 E450.

I have spoken to my dealer. If he buys my car he does not have to pay the sales tax. I have asked him to take my car, buy the car at the residual and use the equity, or a portion of the equity in my car, as a cap cost reduction (down payment) on a lease for a 2022 E450. (Mercedes Financial will extend my present lease until the new car arrives) This would be my third Mercedes from the dealer so I know he wants my business. My dealer says he cannot, that only I can buy the car. He is willing to take an order for a lease on a 2022 E450 at MSRP plus $1,000. I said I am willing to pay MSRP plus $1,000 if he gives me credit in the lease for the equity in my car. He is unwillingly to do so. I explained we both then lose: the dealer loses two sales and the profits: the selling of my car and the 2022 and I lose by not getting a new car.

Has anyone experienced this and a way around this problem? How to use the equity at the end of a lease as a cap cost reduction (down payment) on a new lease. I really do not want to buy my car, pay tax on it and then go to a dealer and use it as a trade. I prefer to take less, let the dealer make a profit on both my car and the 2022 as long as I get a competitive lease on a 2022. The one thing I will not do is pay MSRP + $1000 on a 2022 and walk away from the equity in my car. Before I do that, I will just buy my car.

Any advice is appreciated.

Thanks.

Lanzz

Could go to Leasehackr.com and post in the "Ask the Experts": forum - there is some great info over there on buyout approaches and rules to hang onto positive equity.

Elvisfan0108

The dealer is probably doing what he can do legally. The state wants their sales tax. Your best bet is to buy the car, sell it to a dealer or trade it in. Buy the car, when the new car comes in trade it in. You legally can’t get out of paying sales tax. One of the reasons I don’t lease. I like to decide when I am going to buy a car. But now is an excellent time to buy out your lease.

JTK44

Thanks for your reply:

Actually if the dealer buys the car he does not pay sales tax, as when he sells the car he collects sales tax: so there is no avoidance of the sales tax.

Similarly if I buy the car and pay sales tax, when I put the car into the lease agreement as a cap cost reduction, the sales tax on the lease is reduced by the amount of the cap cost reduction.

As you see in both events sales tax to the state is collected.

The problem with buying the car and then selling it is timing: it takes 6 to 8 weeks after you buy the car to get title from Mercedes Benz Financial. Until you have title, you cannot sell the car to the dealer.

What I have decided to do is to contact the Mercedes dealers in my area, there are over 15 to see if anyone is interested in leasing me a 2020 and putting the equity in my car as a cap cost deduction in a new lease. If none are willing to do it, I will take your advice and just buy the car at lease extension end and keep it. As posted it only has 22,000 miles and another year under the factory warranty.

Elvisfan0108

But what you are trying to do is buy the car. Unless you buy the car, you don’t have equity. And avoid paying sales tax. Good luck with that. When you leased, you only paid sales tax on the lease. If you buy the car, the state is going to get their sales tax. Why would the dealer buy your car? You are turning in your lease. He gets it for nothing.
I understand trying to avoid that tax. State law changed in my state. We no longer get the full reduction in sales tax when we trade. However, I don’t think it’s going to work for you.

JTK44

To clarify: I am not trying to avoid the tax: If I buy the car and pay the tax, when I trade in the car, I get the value of car in the lease as a cap cost reduction: In New York State, the trade in value reduces the price of the car so you only pay tax on the difference. By trading you reduce your tax, so the tax you paid when you bought is offset by the tax savings when you trade. In effect it almost a wash.

At the end of the lease I believe the dealer has the opportunity to buy the car at the residual. As the lessee, the difference between the residual and the trade in value is the equity I have in the car.

FWIW, one dealer has already contacted me that they will take my equity in the car and apply it as a cap cost reduction in a lease on a 2022. This is exactly what I wanted and what my dealer would not do.

Now the question becomes, is how much of that equity is he willing to give me!

I intend to contact other Mercedes dealers today.

Elvisfan0108

As I said, this is why I don’t lease. Too complicated for my brain. I finance. Only need to know 2 things. Selling price and interest rate.

threeMBs

This is factually false. Only a lessee can buy a car at the residual. In order for the dealer to buy the car, you must walk first and then they buy from leasing company. You will have zero equity.

They equity in the car is the difference between the residual PLUS tax and the trade in.

If you buy out the lease, in order to have any equity they would have to appraise the car (trade-in allows) at over $45K. If they say you have $5K equity, they most likely mean based on residual of $41K (WITHOUT tax) which means trade-in is only $46K and is not worth doing it. In order to have equity of $5K, they would have to praise it and be willing to pay you $50K. You need to have it in writing that they will pay you $50K for the car now.

If they commit to pay $50K, then you buy out the lease at $41K and pay $4K in tax. This is $45K upfront (and you will get a title in your name).
Then you immediately (depending on how they handle the title process) sell (not trade-in since you are leasing and not buying) the car to your dealer for $50K (keep in mind that $50K is NOW, who know what it is going to be when your new lease car arrives in a few months). Out of the $50K they pay you, you keep $45K (your initial "investment) and apply $5K to your new lease. The only problem is you must do it now and not have any car until your new ordered car arrives. If you must have a car now, then you keep your lease at current payments month to month and wait until your replacement car arrives. Depending on conditions of car market at that time, you can do what I wrote above (keep in mind that your "equity" most likely will change down) or just walk away from old as normal and into a new car.

JTK44

Are you sure? One dealer has already contacted me. I thought, I could be wrong, that the dealer always has first choice on returned lease cars whether to buy them at the residual or not. If the dealer buys the care from MB Financial then he does not pay sales tax. When he sells the car he collects sales tax.

For me to make this work, the dealer must be able to buy my car at close to or the residual.

If I buy my car, I must pay sales tax, which brings my cost up to $45,000 as you posted. Upon appraisal I will probably get between $48,000 and $50,000 not enough for me to bother. Then I must wait 6 months for the new car at which time my car will be worth less, so buying and then selling really does not work.

JTK44

Update:

Just received an email from a dealer: They say my car is worth approximately $45,000 and I have $3,000 equity in my car that can be applied to a lease on a 2022 E450.

I would not have to buy the car and pay sales tax. The problem is that what they are offering me, $3,000 is not enough.

I will wait to see what other dealers are willing to offer me.

threeMBs

Yes absolutely, the dealer always has the first choice AFTER you return (walk-away from) the car. However, it may or may not be at your residual. Normally it is below, but now is not normal times, so maybe they would have to pay slightly above (only a guess). Regardless, after you walk away what is the basis for them to honor what they told you (regarding the equity) and how will they implement it when your car will arrive in 6 months? What is the enforcement method? How will they book in on their ledger? Once you walk away, you loose all the leverage on a car so where will the $5K come from? They only way I see it is: a.) a dealer is willing to book it as downpayment (very unlikely regardless of how many cars you bought before) or b.) if a dealer will book a discount of $5K on a lease (which they already told you MSRP+$1K) in 6 months. I do not see it unless there is a sudden and very unlikely car market reversal.

Exactly.

Most importantly you must give them your car now (and not continue leasing) to have any chance of equity being applied to a new car in 6 month. My understanding is you need a car, hence what is the point?

JTK44

I have given some thought to when you place an order for delivery in six months whether you are better off owning or leasing the car you will trade in:

In both situations the cost of the new car is fixed: the variable is the value of your care at time of purchase in six months. In all likelihood the value of your car, six months from now will be less whether leased or owned.

However, when you lease you are continuing to make monthly payments which reduces the residual. With a reduced residual, a leased car will retain its equity - the difference between the residual and the market value.

When you own, if the value of the car goes down, this will cost you.

I think when all is said and done, the monthly payments on a lease will be pretty similar to the depreciation plus cost of money on the owned car.

threeMBs

Would be good to know how are they going to apply (or book) the $3K. Sounds like a downpayment.

Edit: also you do not have any equity in the car now because it is not yours. The leasing company has the equity which if you walk away, they will recoup from a dealer taking the car.

JTK44

I do not think that is the way it works:

I continue to make the car make payments under the lease until the new car comes in. By continuing to make payments the residual is reduced thus keeping the present equity in the car. In this way the dealer is protected.

I have heard back from two other dealers all telling me that the equity in my car will be used as a cap cost reduction in the lease.

As the old saying goes: "We have now established that the equity in your car can be used as a cap cost reduction in a new lease": The only thing left is to negotiate the amount of the equity!

As I posted $3,000 equity is not enough. Have to see what other dealers are willing to offer..

JTK44

Cap Cost Reduction in a lease: aka down payment.

BoMB

Depending on the contract language -- the lessee can buy the car at the end of the lease, and assign the purchase to someone else. I did it with a Lexus and bought my friend's car. I paid the sales tax, no different than he would have, but I bought the car for exactly what he had the right to buy the car at. Another time (about 6 years ago) I was returning a MB ML350 at lease end -- and I had the right to buy the car at a specified price. It was an OK deal. My friend -- a used car dealer -- begged me to let him buy it. It was a great deal for him to buy the car. He did, and bought it for the exact same price as I had the right to -- and he did NOT pay the sales tax! He took care of everything with MBFS -- he paid them, took care of the paperwork, and even picked up the car from me, LOL. He sold it overseas -- and took me out for a very nice dinner! LOL. That said, remember, if you lease a car and it goes through MBFS -- they own the car!

There's a lot that goes on behind the scenes, financially, accounting, tax, etc., that most people do not see.

threeMBs

That is great, however it is apple vs oranges. The equity of $3K (or $5K or whatever) in the car is NOW in today's supply disordered market. Do not be so sure that equity will stay constant (continue paying lease to proportionally offset lower appraisal value down the road). Like I said, if the car market reverses in 6 months, there may not be any equity left.

The good thing is you've established (based on what dealers told you) that equity can be applied, however the bad thing is the equity number you're negotiating with them on is for today and not in 6 months. Seriously, how can any of the dealers tell you what the equity going to be in 6 months?

threeMBs

Downpayment now for a lease to commence in 6 months? Unknown MSRP, unknown residual, unknown interest rate. No lease until all these are known. How are they going to keep the $3K on their books for 6 months?

JTK44

First the MSRP is known.

As I continue to pay the lease until the car arrives, the residual is going down: this protects the dealer's equity at the present level or better. In six months I will have reduced the residual by $5,000. That is a lot of room to protect the dealer.

Interest rates are now known plus residual. They change every quarter, but not enough to affect the lease payments

No money is exchanged now - I keep the car until it comes in.

If the dealer reneges on the deal, what you seem to be concerned about, I always have the option to walk away and buy my car.

FYI, I now have been contacted by four dealers all of whom tell me I have equity in my car which can be applied as a cap cost reduction on the new lease.

So I am fine, thank you!

Hopes this helps others who have leases expiring and have equity in their cars.

JTK44

Keep in mind that the reason I have equity in my car is the dearth of both new and used cars.

If in six months supply returns and the value of my car drops, then the dealers will not be able to get MSRP for a new car but have to discount it.

So whether I get money vs. MSRP, or no money vs. a discounted MSRP, the lease numbers will be the same.

I do not like to gamble on what my car will be worth in six months. I am not in the car business and want to protect my downside which is the reason I lease. I prefer not to buy, and let the dealer who knows the market better than I do buy my car and sell it.

If the lease numbers come out right - that is all I care about: It doesn't matter to me if the car is sold at MSRP and the dealer gives me more than the residual, or the dealer discounts the car and gives me zero for my equity.

The_Judge

If it's in good shape and doesn't have excess miles on the clock, I'd certainly buy it. Keep it if you like it, or sell it at a profit and buy something else (understand, however that because of parts shortages, etc. car prices are currently very high).

JTK44

Update:

Was in my Mercedes dealer: He is willing to give me $3,000 above my residual, total $45,000. I see cars similar to mine on Cars.com going for between $53,000 and $56,000. I said that was insufficient.

On a new E450, for delivery in March/April he wants $3,000 above MSRP.

I thanked him and left.

threeMBs

As expected.

Elvisfan0108

You are trying to negotiate when you are basically in no position to negotiate. You have to do something. The dealers don’t. There is very little correlation between selling and trade in value these days. Yes, trade ins are worth more and people are happy to take it. But dealers can take better advantage than you can.
Pay the sales tax and buy the car, or not.

JTK44

I do not necessarily disagree with you: the dealers are in a great deal of difficulty. While most of their income comes from service, they still must carry the substantial overhead of the selling department. They are getting at most 10% of the cars they normally get. A dealer cannot make up the profit loss on selling 100 cars by selling 10 cars no matter how much they add to the MSRP. As the overhead continues, each sale must by necessity bring in more profit. I would not be surprised that by January the dealers will be selling at $5,000 over MSRP.

I do not need to negotiate. I have the option of just buying my car. The dealers have no leverage over me and why I just said "Thank you" and left.

Everyone runs their business as they see fit: I am now retired, but when I was in business, I would never miss an opportunity for additional sales and profit: If the dealer had offered me a reasonable amount over my cost, $4,000 he would have owned my car at $46,000. He could then turnaround and sell it for $52,000 and make $6,000. He then could have sold me the new car at $1,000 over MSRP so his total profit would have been $7,000 and my gain would have been $3,000. Everyone then wins.

Instead he he offered me $2,000 and wanted $3,000 over MSRP, so my gain would have been negative $1,000. Now he has to find someone else to sell the car for $3,000 over MSRP. So he gave up $7,000 in profits to make $3,000.