Getting the customer out of the lease

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Jim Matthews
Columnist

The reasons why customers want to get out of their current vehicle lease are vast and varied. But as a dealer, your work starts by ensuring exit strategy options.

Firstly, you must determine whether your client or the potential client (conquest client) is interested in buying or leasing their replacement vehicle from your store. The replacement vehicle answer will be the catalyst for the next strategy to be presented to the client.

If the client is not interested in replacing their current leased vehicle with a new vehicle from your store, it is incumbent upon the dealership to provide their customer with some viable options.

In essence, the client is responsible to either pay off the balance of the lease (the unamortized amount owed or current buyout of the contract) or to find someone to take over the balance of the lease via the lease transfer method.  

Many customers don’t understand that their dealership’s pre-owned vehicle department would be happy to purchase the vehicle at the fair wholesale value providing the vehicle’s condition meets the manager’s expectations. Dealership sales people can walk the client through the buyout process and appraisal process while at the same time explaining the lease deficiency that often accompanies when getting out of a vehicle lease or finance contract prior to the natural expiry.  

If the lease deficiency is too punitive and the customer cannot afford to pay the difference between the amount owed and the fair wholesale market value, the customer should be advised that manufacturers’ leases are assignable and that they can try to find a third party to assume the balance of the lease.  

In the end, it is a long road and if the dealership helps this customer out today with the best possible solutions in the best interest of the client, that client will likely patronize the dealership once again in the future, or refer a friend, colleague or family member to the store.

If the client is interested in replacing their vehicle with another vehicle offered by the dealership, or a vehicle sold by the dealer group should the dealer group sell more than one brand, then some other decisions must be made by the sales representative and sales manager.

As discussed, most vehicle leases have some lease deficiency attached to the buyout, meaning negative equity will almost always accompany the buyout of a current vehicle lease package.

The question is always going to be whether to bury or over-capitalize the negative equity or to collect the negative equity from the customer or to find someone to take over the lease and avoid the negative equity since the lease will not be terminated because it will be transferred to a new buyer.

The most common practice by sales teams is to use the lease buyout method and over-capitalize the negative equity using current factory incentives, some customer cash and extending the term of the replacement lease or finance agreement.

This method produces a solid car deal today, possibly a used car for the pre-owned vehicle department and a minimum commission for the sales representative. Most customers are satisfied with the results providing they don’t have to get out of the lease or finance contract prior to the expiry of the agreement.

The alternative method, the lease transfer method, causes a conditional deal today (not unlike a locate deal) but requires the dealership to sell another vehicle to make the replacement deal become a reality. The upside is that there would significant room to add additional gross profit within the new vehicle replacement deal to pay the sales rep an additional commission to sell the lease transfer deal and pay the same sales rep a decent commission that is deserved on the new car.

The challenge that most sales managers face four or five times (or more) per month is which is the best method for the dealership, the sales representative and the customer.

Clearly there is no right answer for every case however, the prudent answer is to always try to make a car deal today using the buyout method because it is clean and guarantees that a deal will happen should the customer qualify for the needed credit etc.  

It isn’t necessarily the best financial deal for the client or the best commission for the sales representative, but the definition of best is subjective and the negative long-term ramifications will be dealt with should they arise in the future.  

If the sales department cannot make a deal today using the buyout/over-capitalization method, then, for the sake of the customer, the sales representative and the dealership, the sales team must introduce the lease transfer method into the equation and make a conditional deal with the client subject to the dealership finding someone to take over their lease.

A lease transfer deal can be made extremely attractive by using some of the factory cash available as a cash incentive to the prospective new buyer; some over-capitalization to a lesser extent can be repackaged as an incentive by the dealership in order to enhance the lease transfer deal.  

Well-incentivized lease transfer deals typically are sold to a new buyer -- who also becomes a customer of the dealership -- within two to three days, which is about the same time it takes to do a typical vehicle locate deal.

Using the lease transfer method, the dealership will sell the other customers that they would normally have to walk because the buyout method didn’t or couldn’t work, they will also receive additional surplus buyer leads by virtue of the aggressive lease transfer posting and they will expose the name of their dealership to the extensive market that are looking for lease transfer deals.

In the end, dealerships must use all the methods and tools available to them to sell more cars, satisfy existing dealership customers and win over  customers. The debate as to the best method for dealing with customers who need to get out of their leases will continue, but the welfare of the customer must always be top-of-mind.

Jim Matthews has been the president and general manager for LeaseBusters.com since 1990.  His team specializes in assisting new car dealerships with all their needs related to vehicle leases.  He can be reached at jmatthews@leasebusters.com or toll free at 888-357-2678