For Wes Grueninger, the 2019 Honda Ridgeline was just taking up space in his driveway, but the Seattle-based mobile tech developer realized it offered him a way to fatten his bank account.
This year’s shortage of semiconductor chips has left dealer lots empty and American motorists desperate to find something to buy. That’s sent used car prices surging to record levels — and some savvy owners are cashing in. Lease customers, in particular, can make a killing these days. In his case, Grueninger bought out the lease on his pickup then quickly turned around and resold it for about $8,000 more than what he himself paid.
The trick is that most leases set a buyout price that reflects more normal circumstances. In today’s overheated market, the numbers can fall well below what used car dealers and buyers are willing to spend.
“Used car prices have gone crazy,” Grueninger said by phone, explaining that he was able to sell the 2019 Ridgeline for $36,400, earning $8,200 after completing the buyout. “I wouldn’t have believed it if it didn’t happen to me. Who would pay that much” for a stripped-down, base model truck, he asked.
Return to normal won’t be soon
With no end in sight for the chip shortage, and automakers repeatedly slashing production of new vehicles, the demand for used models is only expected to grow. Prices are up about 25% compared to a year ago, according to the Manheim U.S. Used Vehicle Value Index, the numbers rising 3.6% during the first half of September alone.
“The latest trends in the key indicators suggest wholesale used vehicle values will likely see further gains in the days ahead,” the tracking service advised dealers this month.
That plays well for lease customers who are willing and able to sell a vehicle. When calculating the price of a lease, finance companies estimate the residual value of the vehicle when it’s time to turn back the keys. That figure helps calculate monthly payments. But it also sets a buyout price which a customer can pay to keep that vehicle.
For lease customers, it’s essentially a win-win situation. Most simply return their vehicle and don’t give the buyout price a second thought. If the finance company guessed low, however, they could buy the vehicle out at a discount over current market conditions — something thousands of motorists do every year.
This year, however, the gap has turned out to be unusually high — too high for many lessees to ignore.
Josh Frankel, a New York financial adviser realized that vehicles like his 2018 Jeep Compass were worth at least $3,000 more than what he could buy it for, so he lined up a deal with a wholesaler desperate to find used vehicles.
“It couldn’t have been easier,” he said by phone. “I didn’t have to lay out a penny. He came to my house, I handed him the keys and got a check.”
Not every deal is easy-peasy
Lease customers shouldn’t assume this is a no-brainer. There are some pitfalls. For one thing, the rules covering lease buyouts vary widely from state to state, as Nicola and Joe Pariseau discovered to their own regret.
“We thought we were golden, said Joe, an employee training manager in Atlanta. “But, in the end we wound up losing a few hundred dollars.” Added housewife Nicola, “It ended up being a fiasco.”
The Pariseaus live in suburban Atlanta and, in Georgia, they discovered too late that they not only had to pay taxes when they signed up for the lease, but another $1,800 in taxes when they bought out the lease on the Volkswagen Tiguan. Suddenly, they were in the red.
Meanwhile, if you’re thinking about buying out and then selling a lease vehicle, Debbie Mazza offers another cautionary note. She was excited about getting rid of here 2018 Toyota Camry, especially when she discovered “my car was going for $5,000 more than what my lease said it was worth.”
But there was just one big problem: absolutely everything she wanted to buy or lease to replace the sedan was either unavailable or cost a lot more than she expected, due to the semiconductor shortage.
Mazza had a few choices: spend the extra money she’d make on something new – on a vehicle she didn’t really want – or wait. She chose the latter option. She’s keeping an eye on the market and may yet buy out her lease, but not until she can find the vehicle she really wants.
“I was counting down the days before when I get rid of the Camry and get something I like,” said Mazza. “But it’s not so easy….because of COVID and the semiconductor shortage” if you need to get a replacement vehicle.
How to handle this deal
If you’re going to buy out your lease in order to sell the vehicle at a profit, “You have to think what happens next,” said Michelle Krebs, principal auto analyst for Cox Automotive. “Are you going to be without a car? And if you then go to buy another car — used or new — you could pay on the other end because prices are up and there’s a limit on choice right now.”
Krebs and other analysts offer some basic advice for those thinking about selling a lease vehicle. It starts with checking your lease agreement to see if there are any restrictions on buying out the vehicle and then reselling it. Then, once you have found the buyout price:
- Check to see what the exact vehicle you have is going for. That can vary from place to place. But you can get a good idea using sources like Edmunds or Kelley Blue Book, or used car services with online pricing guides, such as Carvana, Shift or Vroom;
- Check with the finance company, as well as with the state agency that oversees automotive sales to be sure what taxes and fees you yourself might be responsible for. This also can vary substantially by state;
- There are various potential buyers, including the original dealer, used car specialists like Carvana or CarMax, and vehicle wholesalers, or you could look for a private buyers
- Once you know what your car will go for, subtract what it will cost to buy it out, along with any taxes or fees and come up with a final number.
- Perhaps most important of all: make sure you know what you’ll do next. You could wind up selling a vehicle you actually like and then find nothing good to replace it with.
