How Does Flipping a Car Lease Work?

We typically hear the word “flip” used in conjunction with buying and reselling houses or used cars for a profit. However, leased cars can also be flipped, but in a different way and only under certain circumstances.

Let’s explain how you might flip a car lease.

When a car lease is initiated, the lease finance company estimates, and we emphasize the word “estimates”, the value of the car at the end of the lease, which is typically 3 years away. It’s called residual value and is also the purchase option price in most leases.

So, how do they know a car’s value 3 years into the future?

They don’t. But they can make an educated guess based on experience and prior history of resale values.

However, it’s a fact that the estimated value will almost never be correct! The value will turn out to be high, or low, but rarely exact.

Since residual value is based on assumptions about how fast and how much the car’s value will depreciate, those assumptions will nearly always be inaccurate or incomplete. Nobody can foresee the future. Markets change, car buyers’ preferences change, gas prices change, and vehicle reliability histories change. All of these factors affect actual vehicle value.

There would seem to be an opportunity here if the lease company’s residual value estimate is too low for a particular lease. It means the vehicle can be purchased for less than it’s worth. If the lessee (you) buys it and resells it — flips it — he pockets the difference as profit! Some lease companies will allow a third-party purchase, which means the lessee doesn’t have to be the middleman in this process. The buyer simply writes one check to the lease company to pay for the vehicle and writes another to you for the remainder of your agreed-to price. This lets you avoid possible taxes and fees yourself.

Does this really work?

You bet. But it only works in those situations in which the original residual value estimate was too low, which happens in over half of all leases. In some cases, there is potential to make a few thousand dollars. However, the amount by which the estimate was too low might be so small that it makes a flip deal uninteresting and not worthwhile.  In that case, you should simply return the car to the lease company and hope your next lease turns out differently.