mikedozz

with that being said, maybe I can get a ls460 lease cheap when the 500s come out, 600s a month minimal down? Maybe December to remember?

SW17LS

Not gonna be 600s lol, it's too expensive a car for that. Residuals will be very low when you get to the end of the model run.

FatherTo1

What does that mean, Steve, "Residuals will be very low when you get to the end of the model run"? I have never done a lease before so I don't understand the implication here. Do you mean the car won't be worth as much due to the new redesigned model, thus making lease payments higher than they normally would be?

SW17LS

Residual prices are set by the finance company as a "guess" of what % of the original MSRP the car will be worth at the end of the lease. What a lease costs is a function of the difference between the negotiated sales price and that residual, plus a finance charge (the money factor). When you have a high residual, and a low money factor you have a cheap lease. A big gap between the MSRP, the negotiated purchase price, a high residual and a low money factor you have a really cheap lease.

Residuals are highest when a model first comes out, and lowest when its about to get replaced. During a model year in general you see residuals go down from the early part of the model year to the end. Residuals on the LS are already lower, they always are, but you'll see them in the 40s probably by the time the last LS460s are being sold after the LS500 is out.

Does that make sense?

FatherTo1

I follow the first paragraph. I'm still confused as to why the "Residuals on the LS are already lower". I don't quite understand the trend in residuals as a function of model year. Why would residuals progressively go lower? I can sort of see it happening when a redesign occurs because then the previous model is in less demand or perceived as not as fresh, and that can impact residual value/depreciation (all other factors held constant). But let's say the OP is asking this a year or two ago when the body style was still current. Why would residuals still trend lower? What would drive that? To me, a new 2016 at the time would probably be most reliable in the model year run so wouldn't that keep residuals up (depreciation lower) and produce a lower lease payment (holding all other factors constant)?

comotiger

I have never leased, so I enjoyed reading your explanation. Thank you, Sensei Steve !

Here's a hypothetical:
2017 LS MSRP 85K, residual (45%) 38.25K, negotiated price 68K (assuming severe discounts are being offered), lease amount financed 29.75K (finance charge excluded)

2018 LS MSRP 100K, residual (65%) 65K, negotiated price 95K, lease amount financed 30K (finance charge excluded)

So, all other factors being the same, what is the incentive for someone to lease a 2017LS this year if they can wait a bit and lease the 2018 LS, assuming they can get their hands on one??

SW17LS

Residuals for the lender are all about risk. If you set the residual too high, then when the car comes back off of lease you can potentially lose money if you have to sell it for less than the residual cost. If you set them too low, payments are too high and the model doesn't lease. As to why the residuals on the LS are low, you can answer that question yourself. You are looking at a 3 year old LS460 that was originally stickered about $90,000 that is listed for $45,000 retail. Do the math, thats 50%, and thats retail, remember that the leasing company will have to get the lease returned car up to sale condition, etc. If that car leased new with a 60% residual so it had a great payment...the leasing company would have lost money.

Residuals go down as a vehicle ages because as time goes on, vehicle prices fall. Bear in mind the sales price of the car typically also goes down, as a model ages you can get better deals, rebates come out to move units, etc. If I buy a new LS500 the first day its out, I'm going to get the best residual because 3 years from that time the car is going to be worth the most as a used LS500. If I leased the LS460 on its last day on sale, the residual is going to be the lowest, because 3 years from then its not going to command as much of its original price as the LS500, because the LS500 will still be current...

There may be no reason to lease an outgoing LS460 over a new LS500, its possible that the payments would be very similar as you described.

comotiger

Unless someone really hates the absence of V8 in and/or the styling of the new LS, it would then follow from your conclusion that the dealer has to somehow sweeten the deal on the 2017 LS to move them off the lot. Maybe they will offer super sweet leases or sale prices sometime in 2018 (probably not in 2017) to clear the lot. Of course, most Lexus dealers probably don't keep more than 2-3 new LSs on their stock any ways, so this may be a moot point.

SW17LS

Remember too that the % of people who buy the LS vs lease is higher than other models. So the incentives will make the buy gap a big one.

CRowe14

I've leased once before and had a pretty solid understanding of the principles behind it, however, thank you Steve and comotiger for getting a bit more into trending model versus new model details.
No magic behind it all, just margin and percentages.
Now, perhaps im over-thinking it, but could either one of you explain the theory behind leasing used vehicles.
Is there something more to it other than a method to move used vehicle inventory?

FatherTo1

Thanks, comotiger, your example drove it home best for me.