# Owner's Choice in Texas



## bdgtexas (Jan 29, 2012)

Ok, I have searched and read every thread on this forum about BMW's Owner's Choice financing option. I live in Texas so this financing option is available to me. There appears to be conflicting information about the what, how, and why of this option in the various threads. My dealer here seems clueless. This is a long post, but I really hoping to definitively straighten out the OC option.

Here is what I know, in Texas (and Illinois also, maybe others?) you are charged sales tax on the full price of the car regardless of how you buy it; lease, finance, cash, etc. In Texas the rate is 6.25%, or somewhere between $3,000 to $4,000 on a new 5 series. This adds about $70+ per month on a 5 lease compared to normal 'depreciation only' or 'tax on the payment' methods, all other things being equal (about $110 relative to no taxes and BMW's payment estimator, but does anyone have no taxes?).

When you lease, BMWFS is the car's owner so they pay the tax upfront when they title it and it gets rolled into your capital cost making the Texas lease payment MUCH higher. You do not get any of the write offs associated with paying the tax yourself since you technically did not, BMW did. With OC your name is on the title and you 'pay' the tax. Up until 2011 you could write off sales tax in states with little or no income taxes (Texas) on your federal return, resulting in a decent deduction if you paid tax on a car purchase. Congress needs to extend this tax code for this benefit of OC to matter. Assuming they do, the OC financing might really make sense.

Second reason for doing OC would be with your name on the title, pretty sure for insurance reasons OC is considered buying. I haven't leased before, but i was under the impression insurance rates are higher with leases? Also any insurance payouts due to totaling in excess of what is owed go to you, so capital cost reduction might make sense. I have never totaled a car and don't plan to, but different insurance rates concern me. However, with the lower payments, you are probably upside down for a majority of the 'ownership' period. I would figure BMW does not do GAP insurance on an owner's choice?

It appears with Owner's Choice they agree to buy the car from you at a pre-set price in the future or refinance the balloon at the same rate used initially (unless there is a better rate in the future). Are these 'features' true? If you refinance I know you do not have to pay sales tax again because your name is already on the car title versus with a lease you would pay again on the residual value because of title transfer. So that is a true benefit of OC.

I am fairly certain the OC payment is calculated similar to a standard finance payment with a 'future value' at a set date instead of going to 0 on full term. As is covered in other threads OC is a balloon payment loan. For those familiar with excel Payments = PMT(monthly rate, term, PV, FV). Sorry, I love excel. So if your car cost was 65k even *after* Texas taxes:

Standard Loan Payment = PMT(rate/12,term,65000,0)
Owner's Choice Payment = PMT(rate/12,term,65000,residual)
Texas Lease Payment = (65,000-residual)/term + (65,000+residual)*MF

Correct? :dunno: _NOTE: if you live in another state and are reading this your lease calc will be different in where tax gets applied. And, yes, i am neglecting an acquisition fee on the lease. _

So you get the picture, with a 36 month term, 63k MSRP, 59% residual, 2.9% finance rate, 0.00185 MF, and the aforementioned 65k cost with tax: 
OC = 897.94 [edit: Based on comment below that OC uses lease rate of 4.44% OC payment would be 964.65]
Lease = 962.08 (lease somewhere else would be 849.14 + tax, or 902.21 at 6.25% tax applied on the whole payment)

Assuming I am right about how to calc OC, see the benefit? :thumbup:

So here are my two biggest questions, what is the rate on owner's choice? Is it indeed the current finance rate? And how is the residual calculated? Could the residual be calculated with standard lease methodology? What makes sense to me is that the rate is the same as standard financing for the term the money is in play, i.e. right now 2.9% for 36 months. This would be different than the lease money factor. If you use BMW's website Owner's Choice comes out with a lower monthly payment that seems to correlate to using the same residuals as a lease with the financing rate deal for that term. I can't hit those numbers exactly though, which is frustrating (engineer here).

What other factors might factor in to an OC calc? Acquisition fee?

I have not made a decision, lease v owner choice, so i am not really looking to debate the merits of each 'feature.' First I am really trying to pin down the details of owner's choice, so then i can debate accurately. I hope perhaps a dealer can clear this up, or someone that is currently in an owner's choice deal...


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## SARAFIL (Feb 19, 2003)

I work in insurance. There should be no difference in insurance cost for a leased or financed car. The only reason the insurance company even cares is because they have to list the leasing company as an "additional insured" on your policy.


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## CeEl (Jan 26, 2012)

Has been a while since I looked at OC in more detail, so things may have changed, but back when, BMW did charge a higher interest rate for OC than for lease or regular credit. Of course, there were no loan origination charges associated with OC (aquisition fee, security deposit, and other things you have with a lease are *not* part of OC). So taking all that into account, it may effectively have been a very similar cost for financing the car either way (lease vs finance). 

Check with your insurance company on the GAP insurance. Some actually make it part of your regular insurance, typically, there is a time limit (within 1 year of purchase, they will reimburse your purchase price if totalled). With OC, you may stay "under water" for the whole duration of the loan, so 1 year may not be enough, but if you have some cash, you may want to risk having to pay yourself.

BMW does typically include GAP insurance in their leases.


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## TXPearl (Apr 16, 2010)

I don't know if I have all your answers but I have done an OC before and have looked into it a number of times. This is mostly anecdotal, so YMMV.

I agree with your listed "advantages" of an OC vs. a lease. A little bit off topic, however, I'm pretty sure that sales tax paid on both a purchased or a lease vehicle has been deductible. I understand that there was a special new vehicle sales tax deduction as part of the stimulus package in 2009 that was limited to new purchases only. Either way a moot point unless the deduction is extended past 2011.

When I did an OC it included GAP coverage just like a lease.

As noted above, insurance cost is same, lease vs. buy.

I've always seen the interest rate for OC set equivalent to the standard lease rate (or about 4.6% right now). That's different from the purchase financing rates (e.g. the 1.9% specials, etc.). In your calcs, that probably makes up the difference, but you should also factor in the acquisition fee for the lease. Also, if the particular model you're considering has a special discounted lease MF, then that could change the comparison in favor of the lease.

OC residuals are the same as used in lease calculations, so no difference there.

One last wrinkle - I've been told that the TX sales tax credits that BMWFS occasionally offers are applicable only for leases and not OC. If those credits are available for your situation, that would obviously sway things in favor of the lease.


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## mclaren (Jan 5, 2005)

I think OC was dreamed up for people who live in states that charge sales tax upfront and wanted to lease. The big advantage is the buyback guarantee. In stock market parlance you get a free straddle option which is potentially very valuable. You can put the car back to the dealer or you can buy the car for a known amount in the event the car is worth more. In 2008 BMWs were often 10k wrong at the end of a lease, in the late 1970s 3 year old German cars might have been worth more than their original MSRP.


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## bdgtexas (Jan 29, 2012)

*Thanks*

Hey everyone thanks for your input. Your comments have helped.

As I have said, my day job is engineering, so not being able to reproduce numbers on the fly, whether to compare to BMW's website or in the dealer hot seat, is really frustrating.

The standard rate probably makes more sense for the OC as they are taking risk with the car's value. That would also get numbers closer to BMWFS website 'estimator' output. With a BYO car at 64995 MSRP and 0 down 0 trade (to make a comparison calc easier), 10k miles/year, the site suggests a lease of 991 and a OC of 980. Supposedly without including tax. Both seem high to me. The difference is not much to sweat, but its more about being able to reproduce results.

Anyone have any inside info on February's rates since we are knocking on the door?


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## Mynoles1 (Dec 28, 2006)

I have bought two BMW's on OC, most recently my 08 328i. The reasons for doing so:

1) No acquisition fee as opposed to lease
2) Do not pay sales tax "again" if you buy at maturity

Rates and residuals for me were the same. If you turn in at "contract-end" the same disposition fee applies, as will all "lease-end" inspections, etc.

One item of note. When you come to the end you obviously have the option to buy the vehicle at the set contracted (residual) price without paying sales tax again. There is an exception to this. Many here on the 'Fest have opted to purchase their vehicle through their dealer rather than BMWFS - primarily because it can be cheaper (search the threads on FMV/Manheim) and also you can get it CPO'd. If that is your course of action, you WILL pay sales tax again. Only when you buy it directly from BMWFS at the stated value will you avoid paying sales tax again.


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## bdgtexas (Jan 29, 2012)

*Fixed an Error*

Mynoles,

Thanks for the reply.

I have figured out the biggest reason for my error and have edited(ing) my first post above. I was calculating the interest/MF portion of the payment wrong.

However, I still can not ever reproduce the BMW USA site lease offer numbers for a basic lease (no taxes). Does anyone know if they are just figuring you don't pay MSRP in that deal? I figure they have built in about 2700 off MSRP on a 535i and 2300 off MSRP on a 528i in order to hit the 679 and 599 payments they advertise??? This are "reasonable" values below MSRP, but not stated in the fine print.


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## mclaren (Jan 5, 2005)

They have factored in a dealer contribution, so not MSRP.


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