What is Fair Market Value Purchase Option
Fair market value (FMV) purchase option is the right, but not the obligation, to buy a leased asset at the end of the lease term for a price that represents the item's then-current worth. The fair market value purchase option does not provide the purchase price in advance, but as long as the assessed fair market value is accurate, the consumer will not overpay for the asset and the lessor will not receive less than the asset is worth.
BREAKING DOWN Fair Market Value Purchase Option
Types of assets that may come with a fair market value purchase option include automobiles, real estate, and heavy equipment. A fair market value buyout allows a customer to utilize the equipment for a designated number of months with end-of-lease options to continue to lease the equipment, return the equipment and upgrade to new equipment, or purchase the equipment at the then determined fair market value price of the equipment. An FMV lease also is known as an operating lease.
Facts About Fair Market Value Leases
- Fair market value leases are often the most affordable leases.
- Companies commonly utilize FMV leases to acquire operating assets that tend to become obsolete quickly, such as IT equipment, including computers and tablets, servers, software, security systems, GPS, or other technology-based equipment.
- Companies will opt for an FMV when they need equipment for a certain reason but don't wish to retain it longer than the lease term.
- FMV leases help companies manage capital costs while preventing the inefficiencies and maintenance issues related to aging and outdated technology.
- The typical term for an FMV lease range from 12 to 60 months.
- FMV leases feature a fixed monthly payment.
- Since the lessee does not own the equipment, it does not appear on the company’s balance sheet, allowing the lessee to deduct the monthly lease payments as an operating expense.
- To qualify for an FMV lease, the applicant must have a good credit score.
Alternatives to the Fair Market Value Purchase Option
A common alternative to the fair market value purchase option is the fixed price purchase option, which allows the lessee to know for certain what the cost to purchase the property at the end of the lease term will be. Because it is impossible to determine an item's fair market value in advance of the item's purchase date, a purchase price cannot be established in advance with a fair market value purchase option.
Another alternative to the fair market value purchase option is the $1 buyout lease, also called a capital lease. It is similar to purchasing equipment with a loan. Typically, there is a higher monthly payment compared with an FMV lease, but at the end of the lease term, the lessee purchases the equipment for $1. Since it is very similar to taking out a loan on a piece of equipment, this type of lease is often used when a business plans to keep the equipment for a long period of time, or when equipment obsolescence isn’t a concern.