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Understanding a Fair Market Value Equipment Lease Buyout Option

Bulldozer during earthmoving works
So you’re looking to lease some equipment and, in your discussions with various leasing companies, the concept of “fair market value lease buyout” options comes up. What does this mean and what do you need to do to protect yourself and your business?

The Fair Market Value Lease

Equipment leasing companies often use the terms fair market value (FMV), operating and “true” lease interchangeably. What they are really talking about is what will happen when you’ve made all the payments in the lease agreement. There are a number of options:

  • You can often renew the lease, though this may not be preferable if technology has changed.
  • You can pay a “balloon” payment—a lump sum—and own the equipment free and clear. This can be the equivalent of a rent-to-own with a lump sum at the end
  • You can walk away from the lease and return the equipment

Let’s suppose you choose option number two above—to buy out the lease. How can you know at the beginning of the lease period, particularly when it’s a multi-year lease, exactly what the equipment will be worth at the end of the lease? That’s where the concept of “fair market value” comes in.

Technically, the fair market value of an item is the amount that would be paid by a willing buyer and a willing seller in an arm’s length transaction, assuming similar property, condition and terms. How can you be sure you pay a fair price? One of the best ways is to hire an independent third party appraiser—you can find one by contacting the Equipment Appraiser’s Association of North America. It may cost a little, but remember, the equipment leasing company knows a lot more about the value of the equipment than you do. You can benefit substantially by leveling the playing field.

Contact the Law Offices of Howard N. Sobel

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