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      07-07-2009, 09:08 PM   #1
Bobby_LeMans
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opinions on a 09 335i Demo

Talked to a few dealers this past weeks and a offer caught my eye.
just want to know what you guys think.
Feel free to let me know what you guys think about the quote.

I am planning to lease.

09' 335i Coupe Montego Blue
Cream Beige interior
Cold weather package
Premium Package
Steptronic
Ipod and USB adapter
Navigation system

it is a floor model that just broke 100 miles.
car is brand new basically.

Invoice-$45,190
36 months, 12k a year
$550 a month
Paying tax and all the fees up front..so no down payment etc.

let me know what you guys think

Cheers!
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      07-08-2009, 01:44 AM   #2
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"floor" model?

first 100 "floored" miles ...


i guess it's okay since you are leasing it.


oh its missing the sports package.

i think thats pretty important for a coupe.

Last edited by nukezero; 07-08-2009 at 02:02 AM..
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      07-08-2009, 01:14 PM   #3
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Anybody?
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      07-11-2009, 02:01 PM   #4
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To start out, this is a typical test question on a intermediate accounting exam, so if you know an accounting student or CPA, they can answer this question for you. Do not ask the folks at the dealership. Most buyers just see that leasing produces a lower monthly payment. They have no idea that, in most cases, the amount of money they are paying exceeds the value of X years worth of use of the vehicle.

Next, let's look at a few accounting concepts.
1. Useful Life - Any item you acquire has a useful life. At the end of the item's useful life, its accounting value is zero, regardless of whether you are able to actually use the item past its presumed useful life. Thus, we see that "useful life" is just an assumption. For cars, five to seven years is the commonly accepted useful life. (I believe the IRS assumes the useful life of a car is 7 years. You can check the IRS website to find out over what period of time the IRS allows businesses to depreciate cars. That period of time is the IRS' assumption of a car's useful life.)

2. Residual Value - Some items have a residual value at the end of their useful life. The residual value is essentially the "scrap" value of the vehicle, and it is why you can sell an old car and why folks will get some amount of money for trading in used vehicles that are more than 5-7 years old.

3. Time Value of Money - A dollar received now is worth more than a dollar received at some point in the future. This is seen by the fact that if you put a dollar into an interest bearing account, at some point in the future (specifically after at least the first compounding date), you will have more than a dollar in the account. Similarly, if you pay cash for a car, you are paying the car's present value. If you finance a car, you are paying for the car plus the cost of borrowing money. This principle applies to both purchases of cars and leases of cars.

4. Interest - The cost of money is called "interest." Interest is the amount of money party A (the borrower) pays party B (the lender) for the use of party B's money or other valuable asset/item. When you lease something, you must pay the financing company (the lessor) an interest rate that meets or exceeds the interest rate they could have earned had they sold the car to a customer who financed their purchase.

5. Fair Market Value - Fair Market Value is just the price one must pay in cash for an item. If an item has a sticker price of $10, and the seller is willing to sell it for $8, the FMV is $8.

6. Lease - A lease is a contract in which one party (lesee) agrees to pay for the use of all or a portion of an item's value (FMV) over all or a portion of the item's useful life. When the fair market value (FMV) of the item is known (and/or constant), the lessor earns his/her profit from leasing via the cost of money (interest rate) the lessor charges the lesee. When the FMV is not know, the lessor can earn profit by flexing the assumed FMV, the presumed residual value and/or the interest rate.

7. "A Good Price" - There are many good prices you need to consider when leaseing: the price of money (the interest rate assumed in your lease); the price/value of the vehicle itself; the price of the proportional share of the vehicle value you are buying; and the residual value the vehicle is expected to have at the end of the lease.

A good price for money is one that allows you to obtain something of value at a price that does not exceed your cost of money. Thus you will want to make sure the lease is not calculated using an interest rate that exceeds the interest rate at which you can borrow money to buy a car.

A good price for the car is the best price you can negotiate. You absolute should negotiate the price of the car that will be used to calculate the lease.

A good price on the proportional share of the car's value (PSV) is one that does not cause you to pay for more than the sum of what the car will be worth at the end of the lease term and your cost of borrowing an amount of money equivalent to the PSV for the same period of time as the lease.

A good price on residual value is related to the price of the proportional share of the car's value that you are seeking to use.

The finance guys at the dealership may understand lease accounting, but they will do their level best to confuse you because the overwhelming majority of people do not understand leasing at all, and they don't want you to understand how leases work. For example, if at the end of the lease period, the dealer offers you the option to buy the car for $XXX, that amount is the presumed residual value of the vehicle (assuming normal usage and no material impairment of the vehicle during your lease period).

(Note: If the finance guys at the dealer start talking about "money factors" just ignore them. (Note, accounting students use the money factors and you can find them in any intermediate accounting text book. They are called "amortization tables." They are used to eliminate one's having to use/memorize the formulas I will show you below. One can use either the tables (money factor) or one may use the formula; both produce the same result.))

Now, on to figuring out whether the offer the dealer made to you is good...

First, find out what your cost of money (interest rate) is. The interest rate a bank (or the dealership) would give you were you to purchase the car is a reasonable way to determine this.

Second, find out at what price you can purchase the vehicle (not including tax, tag and title as those are constant). Negotiate the best deal you can. Do not commit to (ideally, do not even discuss) leasing before doing this, least you compromise your bargaining position for the lease. This price is the price on which you should base your lease evaluation. This negotiated price is the car's FMV.

Next, using your interest rate, figure out the present value of an annuity (PVoA) of 36 payments over three years at $550 for each payment. (If your first least payment is due prior to your using the car, calculate the present value of an annuity due. If your first least payment occurs after your getting to use the car for a month, use the present value of an annuity.) The result will tell you how much of the car's total value you would have paid for were you to have paid cash for that value today.

You can calculate the present value of your annuity or annuity due as follows:

Present Value of an Annuity: (use this if your last lease payment is due on the day you must return the car to the dealer)
PVoa = PMT [(1-(1/(1 + i)n))/i]

Where:
PVoA = Present Value of an Annuity
PMT = Amount of each payment
i = Discount Rate Per Period
n = Number of Periods

Present Value of an Annuity Due: Since each payment occurs one period earlier, we can calculate the present value of an annuity (PVoA) and then multiply the result by (1 + i). (Use this formula if you get to keep the car for one month following your last lease payment.)

Figure out, obtain, or guess at what the residual value of the car will be at the end of the 36 months. You can use industry standards for the amortization of automobile value; you can ask the dealer what they think it'd be; you can review historic amounts given by Kelly Blue Book and extrapolate those values to apply to your desired vehicle. You could come up with some other method of your own devising.

THE ANALYSIS:

First Evaluation: This evaluation will give you a broad idea of whether you are paying a fair price.
1a - Multiply the FMV you obtained by 3/5. (This is PSV5)
1b - Multiply the FMV you obtained by 3/7. (This is PSV7)

The fractions above are driven by the following:
- Numerator = the length of your lease --> 3 years.
- Denominator = the useful life of the car --> 5 or 7 years.

These two products reperesent the range of the car's FMV (assuming a linear decline in the car's value) you should assume you are paying for over the term of the lease (36 months).

If PVoA <= PSV7, you have a good deal.
If PVoA >= PSV5, you probably don't have a good deal.
When PVoA is between PSV5 and PSV7, you need to decide whether you feel that 5 or 7 years is a better estimate of useful life, but the deal is at least "within the ballpark" of something you should consider, and it is something you should negotiate further if it's closer to PSV5 than to PSV7.

[The calculation I used above to obtain PSV5 adn PSV7 are called "straight line" calculations and they reflect the assumption that an equal amount of the car's value erodes each year of the car's useful life. If you prefer to front-load the decline in the car's value, you can use a "declining balance" method (check the internet for declining balance methods of depreciation to get a formula for calculating this). Common names for these methods are "double declining balance," "150 declining balance," or "sum of the year's digits." I'd suggest using double declining balance if you opt to front load the decline in value.]

Second Evaluation:
2a - Add the PVoA and the residual value amounts.

If the resulting sum exceeds your negotiated price for the car, or God forbid, the sticker price of the car, you are paying for more than the proportional share of the car's value that you will receive over the life of the lease. (Remember, the PVoA number does not include interest; thus this calculation allows you to tell whether you are paying for more than the corresponding proportional value of the car that you seek to obtain over the life of your lease.)

The extent to which the sum of these two amounts exceeds the price you were able to negotiate is profit to the dealership. This is profit in addition to the profit they (or the finance company) earns as interest. Put another way, this amount represents the extent to which you are paying for more than the "value" of three years' worth of use of the the car. You have to decide how much and what kind of profit you are willing to pay for the car.

Dealers make two kinds of profits on the lease/sale of cars:

1 - The profit represented by the excess of the selling price (FMV) over the dealer's cost of the car.
2 - The profit represented by financing your use of their vehicle.

Additionally, dealer profitablity is increased by the speed at which they can receive a car from the manufacturer and in turn sell/lease it to you. The shorter the time period that the car sits on a dealer's floor, the more profitable the dealer is on that car. This is because of the wonders of a thing called "floor plan." (Explaining floor plan is beyond the scope of your question, but basically, it's a financing arrangement.) Because of "floor plan," a point in time will arrive whereby the dealer has paid more for the car than he/she can earn in profit for the sale of the car.

Losses like this are covered by the profit made in the service area of a dealership. A "fully absorbed" dealership does not need to sell cars rapidly because they make enough profit in the service area to cover the operating costs of the dealership. If you can find a dealer that is not "fully absorbed," buy your car there.

But I digress...getting back to the point of your question...In an ideal situation, you will negotiate either the price of your payments or the car's FMV on which the lease is calculated down so that the dealer's profit is limited to your cost of money. The best way (from the standpoint of your keeping control of your negotiating position) to do this is to tell the dealer something like:

To lease this vehicle from you, I am willing to make ## payments of $XXX. Will you accept this deal?

When you make the offer, the finance guy will simply calculate the PVoA at the dealer's cost of money to determine whether they are willing to accept the deal. They will in turn make a counter offer. You are now in a bargaining situation and you have to figure out what you are willing to counter offer and at this point the process is no different than negotiating to purchase the vehicle.

You, of course, will have your handy spreadsheet or calculator so that you can pop in the figures he offer in countering you so that you can quickly determine the "goodness" of his counter offer.

Last edited by tony20009; 07-11-2009 at 07:03 PM..
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      07-11-2009, 04:40 PM   #5
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My parents bought a car with 100 miles on it. They later found out that they lost 8 months of warranty because the car had been been in "service" for that long before they bought it. They also did not qualify for any of the "new car" perks like one free year of Tele-Aid, etc. The dealer did not offer any of this information during the transaction.

Something you may want to consider, especially with the 48 mos. of free maintenance.
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      07-11-2009, 05:38 PM   #6
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Quote:
Originally Posted by tony20009 View Post
To start out, this is a typical test question on a intermediate accounting exam, so if you know an accounting student or CPA, they can answer this question for you. Do not ask the folks at the dealership. Most buyers just see that leasing produces a lower monthly payment. They have no idea that, in most cases, the amount of money they are paying exceeds the value of X years worth of use of the vehicle.

Next, let's look at a few accounting concepts.
1. Useful Life - Any item you acquire has a useful life. At the end of the item's useful life, its accounting value is zero, regardless of whether you are able to actually use the item past its presumed useful life. Thus, we see that "useful life" is just an assumption. For cars, five to seven years is the commonly accepted useful life. (I believe the IRS assumes the useful life of a car is 7 years. You can check the IRS website to find out over what period of time the IRS allows businesses to depreciate cars. That period of time is the IRS' assumption of a car's useful life.)

2. Residual Value - Some items have a residual value at the end of their useful life. The residual value is essentially the "scrap" value of the vehicle, and it is why you can sell an old car and why folks will get some amount of money for trading in used vehicles that are more than 5-7 years old.

3. Time Value of Money - A dollar received now is worth more than a dollar received at some point in the future. This is seen by the fact that if you put a dollar into an interest bearing account, at some point in the future (specifically after at least the first compounding date), you will have more than a dollar in the account. Similarly, if you pay cash for a car, you are paying the car's present value. If you finance a car, you are paying for the car plus the cost of borrowing money. This principle applies to both purchases of cars and leases of cars.

4. Interest - The cost of money is called "interest." Interest is the amount of money party A (the borrower) pays party B (the lender) for the use of party B's money or other valuable asset/item. When you lease something, you must pay the financing company (the lessor) an interest rate that meets or exceeds the interest rate they could have earned had they sold the car to a customer who financed their purchase.

5. Fair Market Value - Fair Market Value is just the price one must pay in cash for an item. If an item has a sticker price of $10, and the seller is willing to sell it for $8, the FMV is $8.

6. Lease - A lease is a contract in which one party (lesee) agrees to pay for the use of all or a portion of an item's value (FMV) over all or a portion of the item's useful life. When the fair market value (FMV) of the item is known (and/or constant), the lessor earns his/her profit from leasing via the cost of money (interest rate) the lessor charges the lesee. When the FMV is not know, the lessor can earn profit by flexing the assumed FMV, the presumed residual value and/or the interest rate.

7. "A Good Price" - There are many good prices you need to consider when leaseing: the price of money (the interest rate assumed in your lease); the price/value of the vehicle itself; the price of the proportional share of the vehicle value you are buying; and the residual value the vehicle is expected to have at the end of the lease.

A good price for money is one that allows you to obtain something of value at a price that does not exceed your cost of money. Thus you will want to make sure the lease is not calculated using an interest rate that exceeds the interest rate at which you can borrow money to buy a car.

A good price for the car is the best price you can negotiate. You absolute should negotiate the price of the car that will be used to calculate the lease.

A good price on the proportional share of the car's value (PSV) is one that does not cause you to pay for more than the sum of what the car will be worth at the end of the lease term and your cost of borrowing an amount of money equivalent to the PSV for the same period of time as the lease.

A good price on residual value is related to the price of the proportional share of the car's value that you are seeking to use.

The finance guys at the dealership may understand lease accounting, but they will do their level best to confuse you because the overwhelming majority of people do not understand leasing at all, and they don't want you to understand how leases work. For example, if at the end of the lease period, the dealer offers you the option to buy the car for $XXX, that amount is the presumed residual value of the vehicle (assuming normal usage and no material impairment of the vehicle during your lease period).

(Note: If the finance guys at the dealer start talking about "money factors" just ignore them. (Note, accounting students use the money factors and you can find them in any intermediate accounting text book. They are called "amortization tables." They are used to eliminate one's having to use/memorize the formulas I will show you below. One can use either the tables (money factor) or one may use the formula; both produce the same result.))

Now, on to figuring out whether the offer the dealer made to you is good...

First, find out what your cost of money (interest rate) is. The interest rate a bank (or the dealership) would give you were you to purchase the car is a reasonable way to determine this.

Second, found out at what price you can purchase the vehicle (not including tax, tag and title as those elements are constant). Negotiate the best deal you can. Do not commit to (ideally, do not even discuss) leasing before doing this, least you compromise your bargaining position for the lease. This price is the price on which you should base your lease evaluation. This negotiated price is the car's FMV.

Next, using your interest rate, figure out the present value of an annuity (PVoA) of 36 payments over three years at $550 for each payment. (If your first least payment is due prior to your using the car, calculate the present value of an annuity due. If your first least payment occurs after your getting to use the car for a month, use the present value of an annuity.) The result will tell you how much of the car's total value you would have paid for were you to have paid cash for that value today.

You can calculate the present value of your annuity or annuity due as follows:

Present Value of an Annuity: (use this if your last lease payment is due on the day you must return the car to the dealer)
PVoa = PMT [(1-(1/(1 + i)n))/i]

Where:
PVoA = Present Value of an Annuity
PMT = Amount of each payment
i = Discount Rate Per Period
n = Number of Periods

Present Value of an Annuity Due: Since each payment occurs one period earlier, we can calculate the present value of an ordinary annuity and then multiply the result by (1 + i). (Use this formula if you get to keep the car for one month following your last lease payment.

Figure out, obtain, or guess at what the residual value of the car will be at the end of the 36 months. You can use industry standards for the amortization of automobile value; you can ask the dealer what they think it'd be; you can review historic amounts given by Kelly Blue Book and extrapolate those values to apply to your desired vehicle. You could come up with some other method of your own devising.

THE ANALYSIS:

First Evaluation: This evaluation will give you a broad idea of whether you are paying a fair price.
1a - Multiply the FMV you obtained by 3/5. (This is PSV5)
1b - Multiply the FMV you obtained by 3/7. (This is PSV7)

The fractions above are driven by the following:
- Numerator = the length of your lease --> 3 years.
- Denominator = the useful life of the car --> 5 or 7 years.

These two products reperesent the range of the car's FMV (assuming a linear decline in the car's value) you should assume you are paying for over the term of the lease (36 months).

If PVoA <= PSV7, you have a good deal.
If PVoA >= PSV5, you probably don't have a good deal.
When PVoA is between PSV5 and PSV7, you need to decide whether you feel that 5 or 7 years is a better estimate of useful life, but the deal is at least "within the ballpark" of something you should consider, and it is something you should negotiate further if it's closer to PSV5 than to PSV7.

[If you prefer to front-load the decline in the car's value, you can use a "declining balance" method (check the internet for declining balance methods of depreciation to geat a formula for calculating this). Common names for these methods are "double declining balance," "150 declining balance," or "sum of the year's digits." I'd suggest using double declining balance if you opt to front load the decline in value.]

Second Evaluation:
2a - Add the PVoA and the residual value amounts.

If the resulting sum exceeds your negotiated price for the car, or God forbid, the sticker price of the car, you are paying for more than the proportional share of the car's value that you will receive over the life of the lease. (Remember, the PVoA number does not include interest; thus this calculation allows you to tell whether you are paying for more than the corresponding proportional value of the car that you seek to obtain over the life of your lease.)

The extent to which the sum of these two amounts exceeds the price you were able to negotiate is profit to the dealership. This is profit in addition to the profit they (or the finance company) earns as interest. Put another way, this amount represents the extent to which you are paying for more than the "value" of three years' worth of use of the the car. You have to decide how much and what kind of profit you are willing to pay for the car.

Dealers make two kinds of profits on the lease/sale of cars:

1 - The profit represented by the excess of the selling price (FMV) over the dealer's cost of the car.
2 - The profit represented by financing your use of their vehicle.

Additionally, dealer profitablity is increased by the speed at which they can receive a car from the manufacturer and in turn sell/lease it to you. The shorter the time period that the car sits on a dealer's floor, the more profitable the dealer is on that car. This is because of the wonders of a thing called "floor plan." (Explaining floor plan is beyond the scope of your question, but basically, it's a financing arrangement.) Because of "floor plan," a point in time will arrive whereby the dealer has paid more for the car than he/she can earn in profit for the sale of the car.

Losses like this are covered by the profit made in the service area of a dealership. A "fully absorbed" dealership does not need to sell cars rapidly because they make enough profit in the service area to cover the operating costs of the dealership. If you can find a dealer that is not "fully absorbed," buy your car there.

But I digress...getting back to the point of your question...In an ideal situation, you will negotiate either the price of your payments or the car's FMV on which the lease is calculated down so that the dealer's profit is limited to your cost of money. The best way (from the standpoint of your keeping control of your negotiating position) to do this is to tell the dealer something like:

To lease this vehicle from you, I am willing to make ## payments of $XXX. Will you accept this deal?

When you make the offer, the finance guy will simply calculate the PVoA at the dealer's cost of money to determine whether they are willing to accept the deal. They will in turn make a counter offer. You are now in a bargaining situation and you have to figure out what you are willing to counter offer and at this point the process is no different than negotiating to purchase the vehicle.

You, of course, will have your handy spreadsheet or calculator so that you can pop in the figures he offer in countering you so that you can quickly determine the "goodness" of his counter offer.
Now that's a quality explanation ! Thanks for taking the time to explain this!
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      07-11-2009, 05:46 PM   #7
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Originally Posted by IrvRobinson View Post
Now that's a quality explanation ! Thanks for taking the time to explain this!
+1. Top notch indeed.
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      07-11-2009, 05:50 PM   #8
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Quote:
Originally Posted by mapsbmw View Post
My parents bought a car with 100 miles on it. They later found out that they lost 8 months of warranty because the car had been been in "service" for that long before they bought it. They also did not qualify for any of the "new car" perks like one free year of Tele-Aid, etc. The dealer did not offer any of this information during the transaction.

Something you may want to consider, especially with the 48 mos. of free maintenance.
I'm sorry to hear your parents got a bad deal on their 100 mile "new car". That's a really shitty dealer that did that to them.

I bought my new 335i with about 100ish miles on it, 25 of them mine from my test drive(s). However, it was very clear in all the paperwork that the "In Service" date was my date of purchsae (08-08-08). So I get the full 4 years, but only 49,900 miles of warranty. Which was ok for me.

Any non "M" BMW on the lot can be used for test drives, although I'm sure most dealers like to concentrate those miles on a few cars. But I'm still not sure how your folks' car wasn't considered "NEW" when sold....
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      07-11-2009, 06:53 PM   #9
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Quote:
Originally Posted by seanl View Post
But I'm still not sure how your folks' car wasn't considered "NEW" when sold....
Check the titling history of the car. If in fact the car was sold as a used car, your parents will appear in the titling history as an owner subsequent to another individual or business that did not import the car to the US.

A car that has been titled to someone other than the financing company/dealer, REGARDLESS of how many miles are on it, or how long the party held the car, is a used car. It is possible to buy a car, drive it substantively not at all (eg, the 100 miles) and have to, for myriad reasons, relenquish the car back to the dealership/financing company.

The second you drove over the curb on the dealer's lot, the car became yours because under contract law, driving over that curb qualifies as your having taken possession (technically referred to as having "received consideration"). Such a car is a used car.



A INTERESTING DIGRESSION

I guess, technically speaking, you could complete all elements of an automobile purchase, but not drive (or otherwise convey) the car off the dealer's lot and you would not have therefore "received consideration" and the car could not actually be titled to you. To test out this theory, next time you go to buy a car, complete all the paperwork to purchase the car. Then have a friend drive you away from the dealership, leaving your newly purchased car and its keys on the dealer's lot. If the dealer asks you anything about why you are doing this (and trust me, they will), tell them you are going to leave it on their lot for some period of time and then come back to take delivery of it at a later date -- use whatever reason suits you. They will go ape-sh*t.

This exact thing happened to me just last month when I bought my BMW. I knew how they'd react, but they had the car I wanted on their lot and I wanted to lock down my rights to the car (there was not another one with the red interior within 100 miles of where I was); however, I also did not have a driver's license at the time, so I had to get one before I could take delivery of the car. I titled it in my father's name initially to overcome that obstacle. (I happened to be paying cash for the car.) The dealer actually tried to get Dad to drive the car away, but as it has a manual tranny, and he cannot operate a manual tranny due to a limb ailment, he could not drive it away.

Dealers go ape-sh*t over this situation because as long as that car sits on their lot, you can cancel the deal, demand your money back and totally walk away; moreover, they are still the "owner" of the car and thus responsible for it, but they are in "limbo" with the car because they have contracted to deliver it to you. If "something" were to happen to the car, you could inspect the car and demand a new, identical one and they would be obliged to provide it to you. Too, because you have contracted and given consideration -- your down payment for that specific car (cars being specifically identifiable by their VIN numbers) and possibly your promise to make x number of payments of a given amount for a given period of time -- and you have not received consideration in return, they also cannot sell the car to someone else, they cannot use the car for test drives, and they must protect the car. Indeed, I would be surprised if they even begin to process the titling paperwork until you actually do come back and take delivery of the car.

(Note: I'm not certain whether the dealer can legally charge you for storge, but I'd hazard they cannot because the car is not yet truly yours; it's sort of yours and sort of theirs, but the burden of possession remains with them.)

Last edited by tony20009; 07-11-2009 at 07:37 PM.. Reason: Added discussion of a situation in which one can cancel the sale/purchase of a car.
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      07-11-2009, 07:17 PM   #10
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Haha I know who to turn to for accounting help Are you a CPA? cuz i intern at a CPA firm and it'd be nice to know someone with knowledge in general accounting and finance lol.
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      07-11-2009, 07:51 PM   #11
tony20009
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[QUOTE=sokdo;5489527]Are you a CPA? /QUOTE]

Yes, I passed the CPA exam. I do not currently practice accounting. I am not currently licensed in any state to practice accounting.

I once was an auditor with KPMG, but my years as an auditor represent the minority of my professional experience. I am a management consultant who provides strategic and tactical advice and support to clients that seek to undergo business transformations to enhance the decision support capability and operating efficiency of their financial management business processes, personnel and technologies.

That said, academically, I was pretty good with financial and managerial accounting theory and practice, and I would be glad to help you as best I can. One caveat, however, is that I do not keep current on the statements and opinions of the FASB, beyond reviewing, as necessary, those that are immediately germane to advising my clients on specific matters they may raise in the course of the projects I do for them.

Cheers,
Tony
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      07-12-2009, 02:58 AM   #12
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Should One Lease or Buy a Car

It is true that in general, the amount of a least payment is lower than the amount of a monthly loan paymnet, but this is only so when one does not make a large enough down payment when buying. So, if your goal is to drive a nicer vehicle than you could otherwise afford to purchase, leasing is the way to go. However, you should also be aware that you are potentially causing yourself to have an overall higher cost of ownership if you lease.

THE REASON
When you lease a car, you really are just paying for the use of a portion of the car's value. When you buy, you are paying for the total value of the car.

CONSIDERATIONS
  • You plan to NEVER not have a car payment. In this situation, go ahead and lease your cars. Use the guidance from my prior post to get the best 2 or 3 year lease deal you can. If you can afford to do so, offer to pay the present value of your annuity of lease payments in a lump sum on the day you take delivery rather than making the payments over the life of the lease term. This will allow you to avoid the interst cost and give you the car for the duration of the lease. Because a dollar now is more valuable than a dollar later, a shrewd seller (business) will take your offer because they then can take your cash and invest it to obtain a greater rate of return than you would have paid them. This, of course, requires that you were able to negotiate the lease's interest rate such that it corresponds to your cost of money. If instead, the interest rate implicit in your lease payments exceeds the dealer's internal rate of return on investment, you did not get a good price on the interest rate and the dealer is far less likely to accept such an offer. (See my earlier post about leasing.)
  • You plan to own just one car and eventually you will want to keep the car (i.e., buy it). In this situation, you should buy your cars, making a large enough down payment so that over the course of your loan, you could at any time sell the car for a sum exceeding (or at least equal to) the outstanding principal balance on any loan you may have obtained to buy the car. You should not be seeking to drive more car than you can afford because the instant you opt to switch from a lease to a purchase, your total acquisition cost will be higher that if you were to have just purchased a car you can afford. (Every dog has his day...)
  • You will own at least two cars, but eventually (maybe 10 years, maybe 20 years, maybe 40 or 50 years...eventually is eventually) you see yourself paring down to just one car that you will keep for a long time. In this situation, you should lease the car you will replace frequently and purchase the car you intend to keep for a long time. Whenever you trade in the purchased car, you should purchase the car that replaces it. Always keep the purchased car for longer than the term of your loan unless your down payment for that car means that you will never be "upside down" in your loan.

    For me this would mean leasing the minivan and buying the Bimmer because eventually the kids will grow up and I will be able to get rid of that dang minivan, but my Bimmer will always be enjoyable to own and drive.

    For my hypothetical cousin with a health disorder that will require her to one day be confined to a wheelchair, it would mean leasing the Bimmer and buying the minivan so she can at least have some fun now while she can still hobble into the Bimmer's driver's seat. (Make the most of today...)

    For my "perfect size 4, salad eating, country club wife with an Mrs. Degree" neighbor lady, it means leasing the Ferraris and Lambo's and buying the 7er because one day, she'll be able to get into the Lambo, but her arthritic, malnourished, skinny butt won't be able to lift herself back out of it. DOH... (There is a time and a place for everything...)
  • Your last name is Ford, Carneige, Mellon, Vanderbilt, Hilton, Ingersoll, Buffet, Gates, et al, or you plan to marry (or at least frequently sleep with) someone having such a name. It really just doesn't matter... Why are you even reading this post?
  • You work in the financial produts division of AIG and just received a retention and/or executive compensation bonus. You should steal the car because you have extensive experience at stealing other peoples' money, and that experience should allow you to get a Bimmer or two at someone else's expense. Obviously, despite your inability to effectively do your job, you get paid more than most folks earn in 10 years; moreover, your employer is paying you a bonus to stay there and continue F**King things up! With that kind of professional accomplishment and managerial support, you won't have to actually take personal responsibility for the consequences of your own actions. The rest of us will just call our insurance company and report the theft. We got you covered, no problem...

(Apologies to the rest of you for the gratuitous rant.)

SUMMARY
- Passion is expensive. (As the owner of a sailboat, I know this to be true...)
- Unless the next point applies to you, don't let passion get in the way of sound financial decision making.
- At a certain level of wealth, the price of a car or lease is immaterial. You can, however, apply some of these principles to the acquisition of your next Gulfstream.
- Negotiate everything!!! Just because you are leasing, you are not prevented from negotiating the elements that factor into the derivation of your lease payments.
- You financial AND life position are both relevant in how you should weigh the choices available to you.
- Over the short and long hauls, cheaper is still cheaper.
- Jerks and thieves should be made to pay for the misfortune they inflict upon others.
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      03-13-2010, 12:32 AM   #13
hookmartins
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Hello,


Don't miss this golden opportunity you get here.

Just go with offer.

Cheers!

______________
Rueckfahrsystem
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      03-13-2010, 12:37 PM   #14
Ronnb
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I looked at a 2009 sedan, new, 49500. Lease with 2k down was 636. I didnt get it, so im still looking. Im also 1 week and counting, BMWLESS. Ron Lol
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      03-16-2010, 01:06 PM   #15
Tuce
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Quote:
Originally Posted by tony20009 View Post
It is true that in general, the amount of a least payment is lower than the amount of a monthly loan paymnet, but this is only so when one does not make a large enough down payment when buying. So, if your goal is to drive a nicer vehicle than you could otherwise afford to purchase, leasing is the way to go. However, you should also be aware that you are potentially causing yourself to have an overall higher cost of ownership if you lease....
Tony, You have just become by far my favorite poster.
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      03-12-2011, 12:35 AM   #16
litaaa
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Hello,
I think it is quite good i like its structure and color. i heard from many people that it is quite good.so i think you have to go with it.

good luck!!

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