By on May 13, 2009

Memo to senior executives at GMAC reading TTAC. Perhaps you can answer a few simple questions. Why do you require all lease returns to be taken back to the auction? Why not let your dealers buy inventory at wholesale prices if they want when the car grounds at their stores? Don’t you realize that this policy only forces more supply into the sale and depresses prices? Better yet, why don’t you negotiate with me a more realistic buy-out price of my 2007 Saab 9-3 lease return? Instead, your firm insists that I pay the stated residual price which is currently approximately $9,000 more than the wholesale value. (I’d be a moron to do that. Maybe some people are. But I think most aren’t.) So you’ll take back another unit to the sale—and there won’t be any miracle on pricing there. So here’s an idea . . .

Sell me my car coming off lease at a price more in line with the market. You won’t incur fees for the dealer, the cost of transport of the car to the sale, auction house fees, and the continuing depreciation loss for the weeks while the vehicle moves/sits in transit/storage. Better yet, you can even finance me. Everyone wins. As it stands now, I’m turning a perfectly good car in to the local dealer in a few weeks. Your policy is forcing me to find a new car, and it’s likely not going to be a GM product given the turmoil ahead for your former parent. In fact, I’m looking at either a German or Japanese luxury car. But I’d prefer to keep my Saab.

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44 Comments on “Ken Elias’ Plea to GMAC: Sell Me My Car...”


  • avatar
    jkross22

    Yet another example of GM playing the role of fire sword juggler and getting distracted. They really are trying to fail. Having said that, isn’t this policy something that has become industry standard?

    When we turned in my wife’s 3 series lease 2 years ago, the dealership said that since the car had over 50k miles (it had 51k miles), it was going to auction. This struck me as odd since the car still looked great and drove great.

  • avatar
    educatordan

    Anybody know what Ford’s policy is?

    Back when I bought my Escort from Avis Ford in 2001, (centuries ago I know) his used lot was filled with off lease Tauruses and Sables (around 50+ of them) that had maybe 25 to 30 thousand miles on the odometer. I would have bought one in a heartbeat if would have had more money and better credit. (I really loved the Sable Wagons with leather and the DOHC V6s and dual exhausts)

    I assumed he had those cars because he did a tremendous amount of leasing. Do you think they were all bought somewhere at auction?

  • avatar
    Pch101

    This is not unique to GMAC. This is how leasing tends to work.

    On a micro level, it may not make sense, but in the macro, it sorta does. A lease payment is driven by its projected residual; a system with more flexibility in it would encourage lessees and dealers to find reasons to push down the residual, which would cost the leasing company more money in the long run.

    A lessor would not fare well in a system in which his retailer has an incentive to pay less than the projected value. For the most part, they are better off keeping these transactions separate. It just so happens that in this individual case, it’s probably the opposite. The real issue here is that the lease was either heavily subsidized in the first place, or else the projected value was just way off the mark, which tells you how weak Saab really is.

  • avatar
    ttacfan

    There is something off in all that (off-lease) car supply chain. I bet doing so would make some numbers on the paper look bad. And someone responsible for those numbers would rather see much more red ink spread around all departments that a little bit, but all concentrated on the desk in his corner office.

    The same stuff goes on with the bank owned houses and houses about to become ones. Two years ago I made a fair offer for a house owned by some bank, which name rimes with Sh*tty. They insisted on the unrealistic price likely based on the balance of the original mortgage. They ended up selling it for 100K less (and 50K less than my offer) in 9 months. I suspect maintaining it for 9 months wasn’t free either.

  • avatar
    ttacfan

    To educatordan: yes.

    In ’03 or ’04 I was shopping for a used Taurus/Sable under 36K miles for my sister-in-law. The biggest selection was not at the largest dealers. It was at a small Mercury/Jeep dealer (I bet it’s quite a rare combination). They didn’t even pretend the cars were their lease returns.

  • avatar
    educatordan

    To ttacfan:

    Thank you, I always learn something when I come here.

  • avatar
    Hippo

    It would take people 10 minutes to figure how to game the system.

  • avatar
    Kyle Schellenberg

    “Memo to senior executives at GMAC reading TTAC.”

    I’m pretty sure this demographic doesn’t exist.

    Like going to the doctor, dentist or getting bloodwork done – reading TTAC for these people is just not a pleasant experience so it’s avoided at all cost.

  • avatar
    Point Given

    What you’ve discovered is the broken leasing model that the manufactuers have pursued. Subvented interested rates with unrealistically high residual values to move some metal. As we describe it in commercial leasing, making 2,000 to lose 5,000(or more) later on.

    GM is going to take a loss on that car coming off lease, no matter of auction or selling it to you. The problem being that you signed a contract stating that the residual value is X and you’d have the option to purchase it for that.

    Interesting to note, that some time ago I interviewed at a Saturn dealer for a sales manager position, the GM showed me that he could buy the lease back for 1500 less than the residual. GM played with it a bit back then. (05)

  • avatar

    My old boss just bought his off-lease M35X from Nissan finance under a deal like what Ken Elias wants.

    Not only did they take the deal with him, they made the deal! Someone from Nissan finance called him up and solicited the deal from their end.

    They not only knocked $5,500 off the price, they agreed to pay for the labor (he bought parts) for the looming major service.

    I don’t actually like Infiniti’s much, but I have to say they had their act together when it came to handling his lease return.

    (BTW – There was a time long ago, IIRC, that PJ’s had an office across Lake Champlain in my hometown. I wonder which came first, the South Burlington location or the Plattsburgh one?)

  • avatar
    wsn

    I think the core of this is creative accounting.

    When a new car is leased, the value created is based on down payment + monthly payment + residual value. By intentionally overestimating residual value, they can create an operating profit. But of course, the problem didn’t go away. So, they will do some write-downs at auction time.

    By such creative accounting, GM essentially changes a consistent quarterly loss into a small profit at times and huge write-downs at others. The executives can expect to receive bonus and free MSM ads when there is a small profit, and bailout money when there is a huge write-down.

  • avatar
    Pch101

    If you’re serious about this, I’d call a higher level person with GMAC. Talking to someone with more authority might get you a result that you want.

  • avatar
    krazykarguy

    I used to work at that dealership!!!

  • avatar
    SunnyvaleCA

    I think Pch101 and Hippo have it right. The “bad” system Ken describes is a result of lessors trying to reduce fraud. Realistically, Ken needs to negotiate with the entity who is actually going to take the loss, not GM or the GM dealer. If all cars go to an auction, the auction process–in theory–sets a reasonable price. The problem is, as Ken points out, that the auction process has some additional costs and tends to under price the cars because bidders are weary of the condition of the vehicles.

  • avatar
    dcdriver

    I would love to get my hands on an 07 9-3. How much would a 2.0t with about 25-30k miles on it go for? I’m guessing $15-17k. Does that sound about right?

  • avatar
    Hippo

    And the principal of the entity that will take the loss is unreachable, because the paper is bundled.

    Anyone in the chain that makes a decision on this deal opens itself to questions.

  • avatar
    cardeveloper

    Relative tried to negotiate a 3 month lease extension on his Chrysler van, because he will be out of state when the lease ends. Chrysler finance refuse to even talk to him about it!!! I did suggest they were probably doing him a favor :)

  • avatar
    moedaman

    I don’t want to rude, but what is the purpose of a private individual leasing a car? Is there a financial benefit compared to buying it? As far as I can tell if you can’t write it off as a business expense, leasing is a losing proposition. Of course I buy a car and hold on to it for 8 – 10 years. My wife and I enjoy going years between car payments, so leasing is an alien concept to me.

  • avatar
    brownie

    moedaman: The benefit to an individual of leasing is that the finance company is taking the residual price risk, not the individual. By leasing, you are long a put option.

    If you plan to own a car for 8-10 years, effectively depreciating it to 0 or close to it, then there is no point in leasing – you have already budgeted for the depreciation. But if you don’t plan to own a car for more than 3-5 years, it can make sense to let someone else take the risk that at the end of your ownership period the car won’t be worth as much as expected.

    It’s not dissimilar from the difference between owning a home and renting. Conventional wisdom is that renting is a “waste of money” because you are paying a landlord rather than contributing equity to your own home. But every once in a while (like the past 2 years), we get reminded that a house really is a risk asset, that prices can go down as well as up, and the absence of downside risk can be an economic benefit to renters.

  • avatar
    redbud51

    Same thing happened to me, only with VW. We had a three year old Jetta come off lease and the buyout was a few thousand dollars high.

    I contacted the dealer as well as VW Credit asking them to consider my counter-offer. The answer was: Nein…ve haf ze residual und you vill pay it!

    And get this, we have 5, damn near all new, VW’s in the immediate family.

  • avatar
    Pch101

    For a car like a Saab, leasing is ideal. The lease will probably be heavily subsidized, effectively making it cheaper than buying one, and if the car ends up being a lemon (which is not unlikely with a Saab), you can get rid of it easily just by handing back the keys at the end.

    You can debate whether getting a Saab makes any sense at all. But once you’ve decided to get one, leasing it is probably the better alternative to buying one.

  • avatar
    holydonut

    moedaman:

    People love to think in terms of absolutes and feel that a quick answer to a complex problem is always readily available. But it’s not reasonable to just toss a blanket statement at everyone and declare that leasing is a bad decision for all parties involved in all situations.

    I would agree that as a pure black and white numbers game, leasing is probably not the best option for a person who is all about quantifying their best-value and all that jazz. So it sounds like you care a lot about the math behind the system, so then I would agree that you should not lease.

    Some of the benefits of leasing are not quantifiable. Some people feel that having the latest car is important for their self esteem, so they love leases because it offers them an easy way to keep a new 3-series in their driveway.

    Some people hate the thought of having a car break down, and view new cars as more reliable. For them, they value leases above the monetary benefit of a $1,500 powertrain repair.

    Some people really want the latest dohickeys and technology. Name me one 4 year old car with heated and ventilated front seats and lane departure detection.

    But, also consider that some leases have more incentives from the manufacturer than a straight up car purchase. As it was pointed out earlier, leasing is a great way to juice the bottom line because it allows a car company (along with its captive finance group) to make some money now and defer the risk (or loss) to some point in time down the road well after they’ve collected bonuses. As a result, you’ll often find dealerships that have different incentive rates to give customers depending on a scenario if the customer wishes to buy or lease.

    The reason you view buying as a good option is because you get to decide when you sell your car. And you’ve decided to sell your car towards the very end of its useful life. At that time, you’ve realized most of the benefit of the car and the secondary market gives you a depreciated value in accordance with what you want.

    A lease is basically a contract that says you’re paying for the use of a car for 36 months (or whatever you negotiate) at which time the car must get sold back to some anonymous auction pool. So the lessor “eats” all that nasty depreciation since the useful life of the car far exceeds what the residual value is at the time of lease expiration. However, consider that with some leases, the incentives are so high that it may make more sense to just lease.

    This is especially true if you want the a new car that has is creak-free with immaculate paint and supportive seats that haven’t been smashed over the past 10 years.

    There is no right answer for leasing or buying. The only suggestion is for a buyer to be informed of all their options.

  • avatar
    VerbalKint

    “Memo to senior executives at GMAC reading TTAC.”
    Don’t ever let go of your dreams, Ken!

  • avatar
    sean362880

    moe-

    Ken for example dodged $9,000 in depreciation by leasing his Saab instead of buying it. That’s an exceptional case, but still there are times where leasing is cost competitive.

    Is there any way to more accurately predict the residual value? My lease is almost up, and the private party value is $4,000 more than the residual. I’m buying it, obviously, but if I had known that to start I would have just bought it in the first place, and avoided the hassle of lease-end paperwork.

    You’d think someone would have figured this out by now.

  • avatar
    Pch101

    You’d think someone would have figured this out by now.

    If the brand is strong and reliability is high, then leasing probably makes no sense.

    If the brand is weak and reliability is a crapshoot, then consider avoiding it entirely, but if you get a new one, you should probably lease it or avoid it.

    If the brand is good but reliability is a crapshoot, then leasing may not save you money, but it gives you a chance to see whether you have a lemon. Consider the lease premium to be a form of insurance.

    If the lease is subsidized, then run the numbers and compare.

    Leasing does have a lot of pitfalls. The worst aspect of it is that a lot of people don’t understand it, so that leaves plenty of room to get ripped off. Most new car buyers would be better off buying a highly reliable car. Buying is almost always a better idea financially; leasing can be good if you have quirky tastes or can find the right supported deal.

  • avatar

    A local SAAB dealer here in Westchester, NY was quoted in a business paper that once leasing stopped, his SAAB sales went from 15-20 cars per month to … 2 cars last month. Most SAAB buyers were leases.

    I agree, this has all the hallmarks of “just send it back as per the contract…someone else’s problem”.

    Keeping a customer is not important. That is how GM got that way.

    Anyone got any idea what Hondacura does ? I have a truck coming off lease in a year.

  • avatar
    peteinsonj

    Also keep in mind that GMAC (and formerly Saab financial) have residual insurance on Saabs that they lease — but I understand that only kicks in during the auction process.

    So selling to the dealer or someone else — means they take a loss.

    I also assume that that kind of residual insurance is no longer available or unaffordable, given the current market — hence so much less leasing.

  • avatar
    guyincognito

    I had a similar situation with Chase Automotive financing. I tried to bargain with them. While they did take a menial amount off the buyout price, they were still asking for thousands over the market value of the car. I just figured that as a non-accountant, I would simply never be able to understand why it was more profitable to auction the car for less than I was willing to pay for it or similarly why it is more profitable to allow someone to foreclose on a house that will never sell than to lower the interest rate on the mortgage.

  • avatar
    pb35

    Pch101

    For a car like a Saab, leasing is ideal. The lease will probably be heavily subsidized, effectively making it cheaper than buying one, and if the car ends up being a lemon (which is not unlikely with a Saab), you can get rid of it easily just by handing back the keys at the end.

    Substitute Saab for Volvo and you have my situation. My XC90 (first lease ever) has been rock soild over the first 2 years, however. I would consider purchasing it at the end of the lease term but I doubt US Bank will negotiate. We’ll see!

  • avatar
    SunnyvaleCA

    Leasing is a great way to juice the bottom line because it allows a car company (along with its captive finance group) to make some money now and defer the risk (or loss) to some point in time down the road well after they’ve collected bonuses.

    So, thanks to the new taxpayer support, we should be seeing lots of great Chrysler and GM lease deals?

  • avatar
    moedaman

    OK, thanks for the explaination on leasing. Like you guys mentioned, we drive our cars close to the end. So taking advantage of depreciation isn’t a big concern to us.

  • avatar
    brownie

    Pch: Nice summary.

  • avatar
    Bridge2far

    “If you’re serious about this, I’d call a higher level person with GMAC. Talking to someone with more authority might get you a result that you want.”
    Sorry, but GMAC will absolutely not negotiate the customer buy/residual price at lease end. If the residual was routinely negotiated at lease end then what really is the residual? The car will end up being inspected within a few days of turn-in and then will either a)be listed on a site available to licensed dealers only called GMAC SmartAuction or b) be picked up by carrier and transported to a traditional auto auction (for licensed dealers only).

  • avatar
    Maverick

    Ken,

    You have to remember a couple of things regarding what seems to be a ridiculous policy at GMAC.

    1. The people who set the original residual value are different than the people who are responsible for auctions.

    As a result, there is no accountability for setting artificially high residual values because their goal is to move the metal on the original sale.

    2. The people who set the original residual value are long gone–probably promoted or moved on to another job.

    As a result, there is no accountability for setting artificially high residual values because their goal is to move the metal on the original sale and get their bonus.

  • avatar
    threeer

    Wait a minute…somebody actually bought a Saab in the last two years? That in itself should be the news story…:)

    But seriously, I’ve been burned twice on leases…never again. Even though the thought of a new whip every two to three years is pretty nifty (I don’t do well in keeping cars much past that), the ridiculous fine print and “extra” fees they find to stick you with at the turn-in have been a real “turn-off” for me an leases.

  • avatar
    jaje

    Leases work where the market does not have a major adjustment. It works in the matter that the residual value is determined in the future.

    Where the returned leased vehicles residual value is actually greater than the market you come out ahead and buy it at the buy out price (a lot of times people who modify leased cars come into this as you get nothing for any improvements unless it was part of the lease deal).

    Where the returned vehicle’s value is less than the buy out price you have little incentive to keep it unless you feel that the difference in the transaction price is the cost of effort of picking up another used car (taking chances that the previous owners took care of it).

    The latter has been the stage in which Detroit car makers took a big hit as their major push for gas guzzlers for profits completely dried up and lease return and residual values tanked ($15k less in some instances!). The leasing companies took it on the chin as they held title, thus owned the car during and at lease turn in.

    I do agree that the return dealer should be given some leeway to negotiate with the lessee on price in order to purchase that vehicle. There only outlet at lease return is wholesale auction where dealers then go buy the cars again.

    In Detroit – practicality and efficiency is not the primary concern – it’s profits for their shareholders and execs pockets.

    If you do your homework a lease deal can actually be a good bargain and give you freedom to upgrade quickly and cleanly. If you abuse the vehicle you will get hit – lose security deposit, etc. However if you are smart…you don’t originate the lease and pay the upfront fees to pay down the rate. You go to swapalease or leasetrader and take over someone else’ lease with the lessor’s permission and paperwork.

  • avatar
    Gardiner Westbound

    Why do you require all lease returns to be taken back to the auction? Why not let your dealers buy inventory at wholesale prices if they want when the car grounds at their stores?

    Hell there’s no reason, it’s just company policy.

  • avatar
    amadorgmowner

    Wishful thinking that anyone from GMAC reads TTAC.
    I wish they would because I need to ask them a qestion: Since they killed my GM dealer where I purchased my leased Yukon XL Denali, will they no come and get it if I choose to return it? I sure as hell am not driving one hour to the next closest GM dealer. If they make me a better deal than my contract residual value, I’ll keep it. But I won’t hold my breath. If I get rid of it, my next purchase will be a Toyota. Thanks GM and GMAC for closing my local rural dealer, you just cost yourselves my business and many thousands of others in Amador County, CA

  • avatar
    Dimwit

    My friend just went through that same process with his Buick Rendezvous. It’s practically worthless and there was no way he was going to pay them the 9 grand they wanted. Nope! No deal. He’s now driving a F150.

  • avatar
    The Highwayman

    I’ve lurked here for years, but this is my first post. I’ve spent a significant portion of my career working for the General in Canada. When it became apparent the condition was terminal I switched to a “Japanese” manufacturer. But enough about me, and back to the issue at hand…

    Regarding GMAC selling cars at reduced prices to dealers, here north of the 49th GMAC WILL sell lease maturities to dealers for real wholesale value vs. the auction process. Then dealers are free to negotiate with(gouge)the original lessee for price not to exceed the original purchase option, and keep the difference as profit.

  • avatar
    jaje

    After I slept last night I came to what seems actual logical reasoning why lease return buy outs are non negotiable. I bet the lessors do not want their lessees bargaining at the time of the buyout (do not open the flood gates to this option b/c everyone will then do it). They may get enough people to pay the buy out price and fees and finance the portion that they make more money (somehow). Does anyone know any numbers or percentages of how many end of term lessees actually buy the unit in question?

  • avatar
    crush157

    I am lurker as well and just went through this request with GMAC for an 06 Saab 9-3. Answer of course was “no dice”.

    Unfortunately, GMAC is now a bailout poster child as a bank. So, they could care less as we are all footing these “upside down” leases just like the housing market.

    I’m finally done with Saab after 4 of them and have no regrets.

  • avatar
    KeithF

    Why does it have to be that exact car, Ken? This seems easily solved by a) giving your car back to GMAC, and b) buying the same make, model, year, color of car for $9K less in the open market. What do you care whether GMAC takes the loss on your car from you or from the auction wholesaler?

    Is it just so you don’t have to empty out all your papers and CDs and such? :-)

  • avatar
    thetruth

    I hate to say it you are all wrong I just purchased a 2007 9 – 3 31K on it that the buy was 21,000 in sept of this year for less then 13000. You just need to press the right buttons . GMAC even has a web site now to buy out the leases early and at a great price . They are going through the auction under 12,900 so GM is changing and doing business the right way . Best of luck thanks

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