Don’t Be “Flipped” to a Lease

One of the most popular weapons in car dealers’ arsenals is the infamous “lease flip”. This is car dealer jargon for switching a customer who originally intended to buy a car to leasing the car.

Of course the motivation to do this is more profit for the dealer and a bigger commission to the salesman. That’s not to say that leasing a car is always more costly than buying one, but it can be if you’re not careful. And not being careful is exactly what happens when a purchase intender becomes a lessee.

Here’s how it happens. You come into the dealership to buy a car. You may have seen the dealer’s advertisement in the newspaper or TV for a particular model. More than likely you are prepared to make a down payment and/or trade in your old vehicle. You have a monthly payment in mind because almost everybody has a budget and we usually translate most purchases into whether or not we can fit them into our monthly budgets. You negotiate the best price you can to buy the car, or maybe the sale price is good enough.

Now the salesman or more often the F&I manager/business manager tells you what your monthly payment will be. Let’s say that you have a trade-in worth $15,000 and aren’t going to put any cash down. The F&I [Finance and Insurance] manager tells you your monthly payment will be $427 per month. But that’s way more than you can afford and you tell him you can’t buy the car because you can’t afford that big a payment. He asks you how much you can afford and you tell him it must be under $350 per month. Now he has you set up perfectly for the “lease flip”.

“Mrs. Smith, I think I have just the right thing for you. What would you say if I told you that you can drive that new car home today for just $349 per month?” You say, “With glee, you say we have a deal!” Guess what? You’ve just been flipped. If you had bought the car at the advertised price or negotiated a very good price, the dealer probably would have made about $1,000 profit. and the salesman would have made about a $200 commission. Not that you’ve let yourself be flipped to lease, the dealer could be making $15,000 and the salesman could be making a $3,000 commission!

I’m not exaggerating. I get calls weekly from victims of lease flips. Many of the callers are elderly and many of them are widows who never bought a car before, but had relied on their husbands. There’s no law that limits the profit that a dealer can make when he sells or leases a car. $10,000, $15,000, and even $20,000 profits are made and usually on leases. The dealers can do this by using the trade-in as a capital cost reduction on the lease but allowing less for the trade than it is actually worth. In the example above, your trade-in may be worth $15,000 but you were allowed only $5,000 to reduce the capitalized costs of the lease. Also, the dealer could have raised the price of the car you negotiated or the sale price to MSRP or even 110% of MSRP which is allowable by the leasing companies.

By manipulating the number of months of the lease and the down payment [capitalized cost reduction], a dealer can give you as low a payment as you ask for and still make an exorbitant profit. Most buyers are so focused on monthly payments that they don’t carefully analyze what they are agreeing to and signing. The shorter the number of months of a lease, the greater impact the down payment has on the monthly payment. A $5,000 down payment reduces the monthly payment on a 36 month lease by $139 per month, $208 on a 24 month lease, and $417 on 12 month lease.

Incredibly many victims of the lease flip, never thought about the fact that after the 12, 24, or 36 month term of the lease, they own nothing. After 36 months, a car with a good resale value should be worth about half of what you paid for it. Many people who have never leased before think they can bring their lease car back early if they want. Leasing is not renting and you can bring your car back early only if you make all of the remaining lease payments. If you had bought the car for $30,000 and financed it for 36 months, you would have about $15,000 in equity at the end of 36 months and no monthly payments. You were building equity with every monthly payment in the purchase but you were building zero equity with your 36 lease payments.

As I said before, don’t let this frighten you from ever leasing a car. Leasing can be a good choice and sometimes the best choice. You can find six articles I’ve written for Hometown News: “Lease a New Car before You Buy It”, “Car Leasing Booby Traps”, “Be Very Careful When Leasing a Car”, “The Lease Acquisition Fee…the Bank’s Gotcha”, “Buy or Lease Your Car at the Right Time of Year”, and “Should I Buy or Lease My Next Car?”

Earl Stewart: Consumerist or Capitalist?

“I’ve chosen to run the article below as my column this week. My dealership was honored to have
this article published in Toyota Today, which is the nationally circulated magazine for all Toyota employees and Toyota dealers in the USA.”

Outspoken Owner is ‘Complex’ Mix of Both

By Dan Miller /toyota today november/december2009

In the South Florida realm where he presides over the Toyota dealership that bears his name, Earl Stewart is a full-blown consumer advocate celebrity. He stars in the store’s television advertising. He posts a blog. He writes a newspaper column. He works the local speakers’ circuit. He even hosts a radio show, greeting his listeners with, “Good morning, my name is Earl and I’m a recovering car dealer.” “I’ve become a symbol,” he says of Earl Stewart Toyota of North Palm Beach. “Everyone wants to meet me. I don’t get any work done.”

Actually, if pressed, Stewart will admit that portraying the straight-talking grandfatherly car salesman who helps customers “get a fair shake” is his work. His three sons, Stu and Jason as co-general managers and Josh as Internet manager, mind the day-to-day store operations. That frees up Stewart, with the support of his wife Nancy, vice president of special projects, to spread his gospel of goodness, even if he ain’t no saint.

“It’s a complex thing,” says Stewart of his customer-centered philosophy. “If I did all of this and it hurt my business, I’d stop doing it. I’m no masochist. I want everyone involved to feel better about buying and selling cars. But it has to work. I have to be honest about that.”

Stewart’s career in car sales has almost always worked. His father, the original Earl Stewart, founded a Pontiac dealership in West Palm Beach in 1937. Stewart joined the family business in 1968 and the Toyota franchise came on stream in 1975. Back then, Stewart enjoyed success by selling cars the old-fashioned way, with high-pressure haggling. He raised his three sons, lived in a nice house, fished from the deck of a 60-foot sport boat and invested in other businesses.

But over the last decade, Stewart has systematically reengineered his approach. The book, “Customers for Life,” by Lexus dealer Carl Sewell was a primary influence. So was the University of Toyota’s Total Quality Executive Management course. But the real wake-up call came four years ago when Stewart was diagnosed with colon cancer.

“I thought I was going to die,” he says. “I now see things in a different light. I realized I wanted to pass along a business to my sons they can be proud of. And perhaps one day they can pass it along to their children.”

As such, unorthodoxy abounds. Advertising that once pushed price now promises fairness, courtesy and integrity. Red hotline handsets programmed to ring Stewart’s cell phone are strategically placed throughout the store, inviting customers to call if they’re not completely satisfied. Stewart’s business card divulges his cell and home phone numbers. Dealer fees, boosting the customers’ cost with little or no increase in value, have been eliminated.

The results? Among Toyota dealers, Earl Stewart Toyota ranks No.1 in volume in Palm Beach County, No. 5 in Southeast Toyota and No. 38 nationally— though located in a town of just 8,000. Monthly sales jumped from about 100 units 10 years ago to more than 350 in 2007, pulling back to the 200-plus level amid the current economic downturn.

“Did I change to sell more cars and make more money? Yeah, that’s part of it,” says Stewart. “But I also feel good about myself and sleep better at night. And my sons definitely feel better about the business, too.”

Reflections on Scott Rothstein, Greed, Courage and Karma

We have an alleged “mini Bernie Madoff” in South Florida and his name is Scott Rothstein. As I write this article, you will see the word “alleged” used a lot because, if I miss it once, Scott Rothstein will probably sue me. Let the record reflect that I intended to use the word “alleged” in front of every bad thing I say about “Scottie”.

First, let’s talk about greed. Guys like Bernie Madoff can scam people so easily because of the greed of the “scamees” [I hesitate to use the word sucker, for fear of being sued]. Most of Bernie’s victims were educated, wealthy, and sophisticated individuals. This raises the question of how such a person could believe that they could continuously earn higher returns on their investments than everybody else and never have a loss year. Add to that that they were refused any information about “how” Bernie was investing their money. Wouldn’t this make you nervous? I can come up with only one emotion that can overcome the common sense that would tell most people that this was a scam and that is pure, unadulterated greed.

The parallels between Bernie’s capers and those allegations against Scottie are many. The investors were educated, wealthy, and sophisticated. Also, Bernie didn’t draw the line at scamming business associates and investors unknown to him. Allegedly, one of Scottie’s biggest scores was from Ted Morse and his family and auto dealerships. Scottie was quoted as saying Ted Morse was his best friend. News reports say Ted was cheated out of $25-$60 million and his own lawyer admitted that it was in the “tens of millions”.

Further parallels are that investors with Scottie were told that they would get a guaranteed 10-15% annual return on their investments…strikingly similar to what Bernie promised his investors. Scottie’s investors were told that no details of the investments could be revealed to them because they were based on confidential settlement agreements. Scottie allegedly told some of his “scamees” that several of the settlements he was asking them to finance were to victims of the infamous Jeffrey Epstein, the Billionaire Palm Beach investor, convicted of paying children for sex. One story that Scottie told was that Epstein flew Bill Clinton down on his private jet to Palm Beach after setting a up a “date’ for Bill with an under aged girl. Of course, Bill wanted to settle this thing confidentially with the young girl who was a client of Scott Rothstein’s. Now, you can’t make this stuff up! Would you believe such an outrageous story?

Now let’s talk about courage. Every day that passes reveals more people who claim they knew Bernie Madoff was a crook all along. If that’s the case, why didn’t they speak up a long time ago? To be fair, there was one man, Alex Dalmady, who did speak out but the SEC ignored him. If Scott Rothstein stole $500 million in such an obvious Ponzi scheme based on such an outrageous premise, why didn’t lots of people speak out? I know local lawyers who, off the record, will say they knew all along that there was no way Scott Rothstein could earn the money to support his decadent life style from the proceeds of his law firms’ legal activities. Why didn’t they speak out before? I can tell you why…they were afraid they would be sued. The operative word here is “afraid”.

Almost every time I write this column, I wave a red flag at somebody [usually a car dealer] who must think about suing me and sometimes do. Abraham Lincoln said, "To sin by silence when they should protest makes cowards of men." He was referring to those who, in their hearts, knew slavery was wrong but were afraid to speak out against the status quo. I could also quote Ray Eberle who wrote “Fools rush in where angels fear to tread”. You can make the call as to whether I’m a brave man or a fool, but I believe in speaking my mind when it comes to those that do wrong.

Finally, let’s talk about Karma. You may never have watched the TV sitcom, “My Name Is Earl”. It’s kind of silly and not everybody’s cup of tea. Of course, I watched it when it first came out because of the name. There aren’t many of “us Earls” around. When I learned that the premise was about a character, Earl Hickey, who changed overnight from being a common crook to an honest person who devoted the rest of his life to redeeming his past sins, I was hooked. After all, that’s the story of my life too. I went from an average car dealer who would do almost anything to sell a car to a consumer advocate for the car buyers of Florida. The word Karma comes into play in “My Name Is Earl” because Earl’s hit by a car and then the wind blows away his million dollar lottery ticket. He interprets this as Karma punishing him for his past sins. He begins a quest to make whole all those he swindled and Karma causes the wind to blow the winning lottery ticket right back to him! You can watch reruns on Fox Channel 29, WFLX, week nights at 7 PM.

Here’s what Karma [or whatever you want to call it] has done for me. As of last month, my Toyota dealership in Lake Park, FL [population 9000] has sold more cars in this year than any other car dealer in Florida except two. We are the 4th largest volume Toyota dealer in the Southeast USA and the 34th largest in the USA. I alluded earlier to my being sued because of what I wrote in this column [which I also blog]. Guess who sued me! It was Ted Morse and his lawyers from Scott Rothstein’s law firm. Not only did Scottie’s law firm sue me on behalf of Ted Morse but they also sued me themselves. They alleged that I had defamed them as well as Ted. Of course, Rothstein’s law firm was dissolved because the FBI is investigating the owner for a $500 million Ponzi scheme and he took all of the law firms money to boot. There isn’t enough money to pay the law firm’s employees or the law firm’s clients and escrow monies. I’m waiting to see if they can scrape together enough money to continue their suit against me and defend my suit my suit against them. Stay tuned for further developments.

Always get an “Out the Door” Price

Many states have laws prohibiting car dealers from adding “fees” onto the prices they quote you. Unfortunately, Florida is not one of these states. The state law in Florida requires only that the dealers disclose on the buyers’ order that this additional charge is not a local, state, or federal fee, but is actually just profit to the dealer.

Almost every car dealership in Florida has this extra profit printed on their buyer’s order, under an assortment of labels like “Dealer Fee”, “Doc Fee”, and Dealer Prep”. You will not see it on the car’s price sticker you will probably not hear any verbal disclosure by the sales person or manager, unless you ask. If you ask, you will be told that “all other dealers charge this” and this is “almost” true.

Florida law also requires that when a dealer has this additional profit printed on his buyer’s order, he must not delete it for some customers and charge it to others. The only way he can effectively eliminate this extra profit is by reducing the quoted selling price of the car by this amount, but keep the dealer fee amount that is printed on the buyer’s order. This is rarely done because dealers do not pay their salesmen or managers a commission on the dealer fee. If you demand the price be reduced to compensate for the dealer fee, it cuts the salesman’s commission. Dealer fees range from $500 to $900 and a typical salesman’s commission is 25%, costing the salesman $125 to $225.

Florida law requires that a dealer include the dealer fee in the price of an advertised car. This is often ignored by dealers advertising on the Internet and in direct mail because it is below the “radar screen” of the Attorney General’s office. In newspaper, TV, and radio ads one car is advertised at a low price with a seemingly innocuous designation like “#1234B” (the stock # of the car) all there is to tell the buyer that only one car is available at this price. Another common tactic is a fine print disclosure at the bottom of the ad reading “price good on date of publication only”. The odds of being able to buy one of these cars at the advertised price are not good. Not only is there only one car with the price good for just one day, but the salesman receives no commission or a much smaller commission if he sells you this car.

My advice is not to pay much attention to advertised car prices. Do your shopping on the Internet or by telephone. Insist on an “out the door” price including everything except sales tax and license tag. If buying a new car, get several “out the door” prices quoted on the exact same year, make, model, and accessorized car. Two very good free Web sites to get information on dealer costs and fair retail prices are www.kbb.com and www.edmunds.com. Consumer Reports is also an excellent source of product information and pricing information, but there is a fee for their Web site.