Copier leases can be provided with either a $1.00 Buyout Option or a Fair Market Value Buyout Option. Many who consider leasing find themselves wondering what a fair market value buyout is. The fair market value of an asset can be defined as the price an asset would sell for or be valued at in an exchange where both the buyer and seller are knowledgeable, self-interested, and not pressured. Often during my 28-year career in copier sales I have been asked which buyout option makes the most sense for the consumer; a $1.00 buyout option or a Fair Market Value buyout option?
Distinctions Between Copier Leases
Fair Market Value Buyout Option:
When a lease contains a Fair Market Value buyout option commonly referred to as FMV the consumer has the ability to purchase the equipment at the scheduled end of the lease term for the Fair Market Value provided that the lessee has sent the lease company written notice of their intent to exercise the option. The letter to exercise intent must be sent within the window of time indicated in the terms and conditions of the copier lease agreement. Point of note; Fair Market Value or FMV buyout options may also be referred to as True Leases or Evergreen Leases.
$1.00 Lease Buyout Option:
When a lease contains a $1.00 buyout option the consumer has the ability to purchase the equipment at the scheduled end of the lease term for $1.00 provided that the consumer has sent the lease company written notification of their intent to exercise the option. This letter to exercise intent must be sent within the window of time indicated in the terms and conditions of the copier lease agreement.
It is worth noting that any copier lease provider is equally able to offer either a $1.00 or a Fair Market Value buyout option based on the lessee’s preference. At first blush, it would appear that anyone would prefer the $1.00 buyout allowing them to own the equipment for a single dollar at the conclusion of their payment stream. Beware that there is a premium to be paid for the $1.00 buyout and it very well might not be in most lessee’s best interests which is why Fair Market Value leases comprise more than 90% of all the copier leases written.
Trade-offs of $1.00 Buyout Copier Lease
What are the trade-offs of a copier lease with a $1.00 buyout? The obvious upside to a copier lease offering a $1.00 buyout is that it provides a pre-determined, agreed upon option to own the equipment at the end of the term for just $1.00. When looked at singularly this appears very attractive. However, the monthly payment on a copier lease containing a $1.00 buyout option is approximately 15% higher each month than the same copier lease containing a Fair Market Value buyout option. In effect, the lessee is paying 15% more every month to ensure their ability to purchase the equipment at the end of the lease term. When you consider that the buyout option is not exercised in over half of the leases containing the $1.00 buyout option it illustrates the credible concern that you might be paying a 15% premium for nothing. Also consider that if the lessee instead had a lease containing a Fair Market Value buyout option they most likely could negotiate to purchase the equipment at the end of term for less than the total of the 15% premium that the lessee had paid over the stream of monthly payments on a copier lease containing the $1.00 option.
Trade-offs of a Fair Market Value Buyout Copier Lease
What are the trade-offs of a copier lease with a Fair Market Value Buyout? The obvious upside to a copier lease offering a Fair Market Value buyout option is that the monthly lease payment is approximately 15% less each month than a lease payment containing a $1.00 buyout option. One certainty with any copier lease agreement is that it is non-cancellable during the scheduled term of payments. Therefore with a Fair Market Value lease agreement the lessee is assured that they will be paying approximately 15% less for their lease payment each month of the entire term of their lease agreement. If at the end of the lease term the lessee wishes to purchase the equipment they will have the ability to buy the asset for the fair market value of the equipment at the end of the term. It is worth noting that in most cases the fair market value of a copier at the conclusion of a lease term is less than the total of 15% of the stream of lease payments meaning that should you choose to purchase the equipment at the scheduled end of term you will likely have paid less on a FMV lease than you would have with a $1.00 buyout lease. The untold benefit is that if you are one of the majority of lessee’s that choose not to exercise the buyout option at the scheduled end of term you will have paid 15% less each month than if you had chosen the $1.00 buyout.
Based on the information noted above the writer of this article feels that in most cases a Fair Market Value buyout option makes more sense than does a $1.00 Option. On a FMV lease, the lessee absolutely is going to pay less each month for their payment. If the lessee decides not to purchase the equipment at the end of term, they will have saved 15% through the entire schedule of payments. Should the lessee with a FMV option choose to purchase the equipment the lessee will likely pay less to exercise the fair market value buyout than they would have paid in contrast to having a 15% higher payment on a lease containing a $1.00 buyout. In summary in the vast majority of cases a lessee will pay less on an FMV lease whether they purchase the equipment at the end of term or not and they will have considerably more flexibility with the FMV option.
