Lease Purchase Buyout Option; Why You might be Happier with a $1.00 buyout
You’re considering a new (or used) equipment lease and are unsure about the best buyout option. This article might help you decide which choice is best for you. Typically, you have three alternative lease purchase buyout option (s) from which to choose.
- Fair Market Value purchase option
- Fixed percentage option – often 10%
- $1.00 buyout – you own the equipment after making all of the lease payments
Why Lessees Sometimes Choose Fair Market Value Purchase Option
You will get the lowest lease payment with this (FMV) end of lease option. in general, this option will also cost you the most at lease end, one way or the other. Do you know why? Here’s the reason; with an FMV option, you may either purchase the leased asset or send it back to the lessor. In other words, at lease end you’re going to pay one way or the other. That assumes you don’t continue leasing the machine on a month to month basis or you don’t upgrade to another lease with the same company. But, I’ll discuss more on upgrades and renewals in other posts.
Fair Market Value – Pay Me Now or Pay me Later
Lessees I’ve questioned chose 3 main reasons why they chose a fair market lease:
- The payments are lowest
- They don’t want to own used up equipment at the end of the lease
- They want the tax benefit of a “true” lease so they can expense the lease payment
Here’s why you need to rethink these reasons for an FMV lease purchase buyout option. First, as I mentioned in the previous paragraph, the end of lease expense of sending back the equipment is often unanticipated. You can spend more on insurance and shipping alone, than you might spend over the lease term with a $1.00 Lease purchase buyout option. Second, you may get hooked for more than you anticipated if the lease auto renews after the initial term. Carefully read auto renewal provisions in your lease. The renewal clause will be clearly marked and be pretty easy to understand. Beware that equipment leases will often give a narrow window for you to notify the lessor of your intent at lease end.
Points for consideration and comment:
Do you know where the equipment needs to be returned at lease termination? Do You have any idea what the return of the equipment will cost you? I would love to hear your comments and experiences on these points. You may save someone else the anguish from your own personal experience. Perhaps you had a good experience. That’s important to know as well.
You may be shocked by what you discover as an answer to these questions. Moreover, you may find you will spend less and be less exhausted from the hassle if you own the equipment ($1.00 purchase option) at lease end.
Fixed Cost or FMV Lease Purchase Buyout Options – An Accounting Perspective
I discussed Capital Leasing and pointed out that most equipment leases are capital leases, as compared with operating leases. You should recognize that capital leases are listed on the balance sheet as assets and depreciated. Small equipment, such as a copier has a useful life of 5 years. So, In the past you may have been able to expense said office equipment on a 3 year lease and come out ahead. In that case, you would have good reason to choose an FMV purchase option – to benefit from the expense provision of an operating lease. The FASB has changed that. Read on.
Effect of New FASB Lease Accounting Laws – How is Lease Buyout Perspective affected
You won’t be able to expense equipment leases beginning in 2019. The new Financial Accounting Standards Board lease requirements, decided February 26, 2016, erase the operating lease. All equipment leases will be capital leases, subject to balance sheet capitalization and depreciation. The reason this is important, is that you don’t have an accounting reason to opt for a “true” lease. Why? Because you can’t get the expense benefit that you could with an operating (true) lease. You may want to change your approach to leasing as a result. Read on and decide for yourself.
$1.00 Lease Purchase Buyout Option More Attractive Than Ever
Why would you not want a $1.00 buyout lease? Since you won’t benefit from an operating lease (doesn’t exist) as an equipment lessee, there is only two remaining reasons you may have for not wanting a $1.00 buyout.
- You want to minimize your lease payment
- You don’t want the old equipment
Do you think these are good reasons? If you think yes, I want you to make sure that I’ve been clear on the outcomes of an FMV buyout. So much so, that I am going to reemphasize the four things that will alternatively happen at the end of an FMV buyout lease:
- You will pay the FMV buyout – It will usually cost more than if you had built it in with a $1.00 buyout
- You will pay to ship the equipment back – This is at your expense for insuring the asset, and shipment
- You will roll the buyout into a new lease – Don’t think for a minute this doesn’t cost you. The buyout will be added to the next lease and financed for the next lease term. You will be paying interest on interest in this case.
- The FMV lease will renew – This doesn’t happen with a $1.00 lease purchase buyout option. Even if it auto renews, you will ultimately have to face 1-3 above.
Direct Benefits of Electing a One Dollar Buyout Lease Purchase Option
if you elect the $1.00 buyout, you will avoid all of the 4 enumerated costs above. Additionally, Its been my experience in the copier industry, that customers benefit from owning the equipment at lease end and gain additional low cost use from the asset. You should expect that other industries wouldn’t differ widely in that regard. However, it is the customers who upgrade their leased equipment before lease end, who perceive the lower payment as the benefit. Regretfully, I believe sales reps tell most of those customers that the rep will take care of the old lease, never explaining that the stream of payments and buyout is rolled into the new lease.
I hope this article has been helpful for you. If you like this article, please share it with others you know. You can find me on Facebook and like my page at https://facebook.com/lesseesadvocate, or linkedin at https://linkedin.com/in/lesseesadvocate
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