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The Wave of Off-Lease Vehicles is Coming

WEDNESDAY, DECEMBER 13, 2017

Used car dealers and shoppers are about to experience a robust and steady supply of high-quality, late-model used cars, SUVs and trucks available for sale, thanks to the auto industry’s recent push of bargain leases.

The Great Recession saw automakers cut back on bargain lease deals, but the past few years have seen a return of highly favorable lease deals for consumers, which has helped boost U.S. new car sales. For instance, from the tail end of the Great Recession in Q3 of 2009 to Q1 of 2017, leasing’s share of total new retail vehicle sales rose from under 20% to more than 31%. Even if leasing is expected to plateau through 2017, the short-term outlook for leasing remains strong, likely tapering below 30% as automakers offer less generous lease deals in coming years.

With a high volume of these leased vehicles returning to dealerships as two-to-three-year-old off-lease vehicles, used car buyers and dealerships have a greater selection to shop. The extensive supply of quality, pre-owned vehicles at more attractive prices is a win for buyers of used cars -- whether that be the car-buying public, or used car dealers at auto auctions.

A Shift Toward SUVs in Leasing & Financing

Now, after seven consecutive years of rising U.S. auto sales and lease volume, demand for new vehicles is slowly waning; this is likely due in part to the attractive selection and prices of late-model, “nearly-new” vehicles coming back off leases.

Along with the seven consecutive years of lease volume growth and an all-time high of 4.3 million leased units in 2016, there has also been a shift toward SUVs. In fact, 2016 marks the first time that SUVs have outsold passenger cars. While the outlook for off-lease sedans is not as bright, the healthy supply of returning off-lease SUVs should find plenty of willing buyers, as Americans continue to show favor toward more versatile SUVs and crossovers.

Opportunity for Interstate Sales of Off-Lease Vehicles

The share of out-of-state new car purchases has continued to grow as online car shopping has become easier and more transparent; the same could happen in the market for “nearly-new” CPO vehicles backed by extended factory warranties.

Lease rates vary quite drastically across the country, which provides a unique opportunity for car dealerships in regions with high lease rates to seek out-of-state sales on their strong supply of off-lease inventory. The Northeast and New England feature some of the highest lease rates in the country; the domestic auto industry’s home, Michigan, currently holds the top spot in lease penetration, at greater than 60% of all retail vehicle sales. In contrast, the Southeast and Sun Belt states, excluding Florida and California, have some of the lowest percentages of leased vehicles in the country.

With lower volumes of off-lease cars returning to dealerships in states like Georgia, Louisiana and Texas, buyers in these states may need to extend their used car searches outside state lines. On the flip side, states, where off-lease inventory is high, presents many options for local buyers, which could leave some excess inventory slower to sell locally. Here lies an opportunity for used car retailers to seek out buyers from further afield, in states or regions where there is less choice in late-model used cars for sale.

To Certify or Not to Certify

Pristine, off-lease vehicles make prime candidates for certified pre-owned (CPO) programs, so both used car buyers and dealerships should see an increase in CPO availability and sales volume with the increased off-lease vehicle supply. The higher volume of off-lease cars, SUVs and trucks provide the opportunity for dealerships to not only grow their inventory of certified pre-owned (CPO) cars, but also increase used car sales from out-of-state and non-regional buyers.

Of course, for dealerships, there is no absolute science for determining which vehicles from their burgeoning off-lease supply should be certified, and which should remain late-model used cars. Certifying the top-quality, lowest mileage vehicles makes certainly makes sense. Late-model off-lease cars with higher mileage approaching the manufacturer’s cutoff point for mileage restrictions in its CPO program could also be worthy candidates; providing buyers with added reassurance on higher mileage used cars could move the vehicles off the lot faster. With a strong selection of off-lease cars returning at any given franchise dealership, keeping some vehicles as used car low price leaders is always an option, as it gives consumers a more varied price range to shop for the same model of car at a single dealership.

Moving a late-model, off-lease vehicle through an out-of-state sale should be easier than with a ten-year-old car with no warranty. Taking it one step further, a certified pre-owned car that is priced right should be an easier sell to a buyer from 500 miles away than even that off-lease used car. Of course, there are costs associated with certifying a late-model used car through the automaker’s factory CPO program, as well as the time for the inspection process, any reconditioning needed and finalizing the certification documents. While just about any car will sell at the right price, selling at a targeted profit margin is key for used car dealers. Therefore, the decision to certify or not certify current or upcoming excess off-lease inventory must be determined on a car-by-car basis.