Lease Buyout

A lease buyout is the purchase of a leased vehicle by the person leasing it, at a price the lease itself sets. The federal consumer leasing rules call the right to do this a purchase option. 12 CFR 1013.4(i), in Regulation M, requires a lease to disclose "A statement of whether or not the lessee has the option to purchase the leased property", and then, if the option exists at the end of the lease term, "the purchase price", or if it may be exercised earlier, "the purchase price or the method for determining the price and when the lessee may exercise this option."

The phrase "lease buyout" is what people search for and what dealers say. It is also used for two other things that are not this: a loan taken out to pay the option price, which is ordinary closed-end credit, and a landlord or tenant paying to end a property lease early, which shares nothing with this subject but the words. Published material on car leases covers the lease itself; this page covers the decision at the end of it.

The structural fact that makes the decision decidable: one number is fixed and the other is not. The purchase-option price is set when the lease is signed, and Regulation M requires it to be a real number. Official Interpretation 4(i)-5 provides that "Lessors must disclose the purchase-option price as a sum certain or as a sum certain to be determined at a future date by reference to a readily available independent source", and then closes the escape hatch: "Statements of a purchase price as the 'negotiated price' or the 'fair market value' do not comply with the requirements of § 1013.4(i)." What the vehicle will actually be worth three years later is unknown to everyone at signing. So the buyout is a decision the contract priced in advance and the market reprices later, and it becomes worth taking when the second number has moved above the first.

A disclosure that must be made in the negative, which is unusual. Interpretation 4(i)-1 states that "Generally the lessor need only make the specific required disclosures that apply to a transaction. In the case of a purchase option disclosure, however, a lessor must disclose affirmatively that the lessee has no option to purchase the leased property if the purchase option is inapplicable." Silence is not permitted. If a lease says nothing about buying the car, that is a defect in the disclosure rather than an answer to the question.

A right to bid is not an option, and this is the trap a reader walks into. Interpretation 4(i)-2 says that "Whether a purchase option exists under the lease is determined by state or other applicable law", and adds that "The lessee's right to submit a bid to purchase property at termination of the lease is not an option to purchase under § 1013.4(i) if the lessor is not required to accept the lessee's bid and the lessee does not receive preferential treatment." Being told at signing that you will be able to buy the car at the end is not the same as having the right to, and the difference is whether the lessor is obliged to sell.

The fee, and where it hides. Interpretation 4(i)-3 provides that "A purchase-option fee is disclosed under § 1013.4(i), not § 1013.4(d). The fee may be separately itemized or disclosed as part of the purchase-option price." So the fee is permitted to be folded into the price rather than shown separately, and a lease that quotes one clean number may already have it inside. Interpretation 4(i)-4 does the same for official charges: taxes, licenses and registration "charged in connection with the exercise of a purchase option may be disclosed under § 1013.4(i) as part of the purchase-option price ... or may be separately disclosed and itemized by category", and a lessor may instead state that the price "does not include fees for tags, taxes, and registration."

Put those two interpretations together and the practical instruction follows: the number printed on the lease as the purchase-option price may or may not already contain the option fee and the official charges, and the lease is required to tell you which. That is the sentence to find before comparing anything to a market value.

Whether and how sales tax applies to a buyout is state law, and it can be a large fraction of the difference between the two prices. It is worth establishing before the comparison rather than after it.

The lease states whether a purchase option exists, and if it does, the price and when it can be exercised. Near the end of the term the lessee compares that price against what the vehicle is worth, adds whatever tax and official charges apply, and either exercises the option, pays cash or finances it with a separate loan, or returns the vehicle. Returning it brings the lease's own end-of-term charges into play, which published material on car leases covers.

A hypothetical showing why the comparison is not the one people make. Theo's lease states a purchase-option price of $16,400 at the end of the term and a purchase-option fee of $395, itemized separately as Interpretation 4(i)-3 permits. Comparable cars are selling for about $18,000, so the buyout looks like a $1,600 advantage.

Now finish the arithmetic. The price plus the fee is $16,400 plus $395, or $16,795. Suppose the state taxes the transaction at 7 percent of that amount, which is $1,175.65, and title and registration come to $135. The total cost to own the car is $16,795 plus $1,175.65 plus $135, or $18,105.65. Against a market value of $18,000, Theo is about $106 worse off, not $1,600 better off. Whether sales tax applies to a lease buyout and on what base is a question of state law, and it is the single item most likely to swing this comparison, which is why it belongs in the calculation rather than after it.

The point is not that buyouts are bad deals. It is that the number printed on the lease is not the number to compare, and Regulation M's own interpretations tell you which charges may be sitting inside it and which may not.

Pros

• The price was fixed at signing, so a lessee who has watched used values rise is holding a contract that was written before that happened.
• The vehicle's service history, how it was driven and what has already been replaced are known facts to the lessee rather than assumptions about a stranger's car.
• Buying avoids the end-of-lease charges for excess mileage and for wear beyond the contract standard, since the vehicle is not being returned for inspection.
• The disclosure is enforceable. Regulation M requires the option and its price to appear on the lease as a sum certain, so the terms are on paper long before the decision.

Cons

• Tax, title and registration can consume the whole apparent advantage, and whether they apply is a matter of state law rather than a fixed federal answer.
• The purchase-option fee may be inside the quoted price or shown separately, so two leases quoting the same number are not necessarily quoting the same thing.
• A right to bid is not an option. A lessee who was told they could buy the car may find the lessor is not obliged to sell it.
• Financing the buyout is a separate closed-end loan on a used vehicle, priced as one, which is a different rate from the one the lease implied.
• Buying keeps a vehicle whose repair costs are ahead of it rather than behind it, and the warranty position at that point is usually worse than it was at delivery.