The age-old practice of relying solely on third-party prognosticators for residual value estimates is evolving, as financiers and automakers put their heads together to develop more tailored expectations of lease-end values.
“They’ve changed the way they use the guidebook,” said Rene Abdalah, a vice president at residual value insurance provider RVI, at a recent conference. “They might use more than one guidebook. Some of our clients are getting more creative and doing more analysis themselves.”
Once companies complete their number-crunching, they often call on guidebook analysts for interpretation. “I think they depend on us more for help in their analysis and understanding their analysis,” said Ricky Beggs, managing editor of Black Book.
Even manufacturers have become more amenable to a collaborative approach. “We have been in meetings with OEMs more open to sharing than they ever have before,” said Eric Lyman, director of residual value solutions at ALG. “They want to make us understand where their brand is headed.”
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As someone who starting an auto leasing company (Vanguard Credit dba Decisive) especially for used cars back in 1997, I can relate to your article. In fact, our company has become more of a consultant to lessors in recent years because of the expertise we delevoped in modeling our own residual values. When we started, ALG didn’t even want to sell use the residual values we were interested in. Now we have a very sophisticated model for auto lease portfolios. ALG does a fine job of estimating future values, but no one is perfect. Furthermore, if a bank, finance company or credit union uses ALG data to begin with, having ALG re-estimate or re-evaluate a portfolio later has little or no value because their methodology is same in both cases – and after all, why would their second “guess” be better than their first “guess?” The mathematics of risk relies on a branch of calculus called Stochastic Calculus, which is, in essence, a combination of regular calculus and probability theory. The real power in this branch of mathematics is that random variables which define risk in the auto lease world can be represented by a Monte Carlo process. Our model uses this math to help us define and manage risk for our clients/partners.
Having seen Brad’s model, I can attest to its applicability. Smart lessors are developing their own residual models and forecasts, leveraging their experience and incorporating current incentive programs. The advantage of this approach is realtime residuals, rather than waiting up to 60 days for a guide to be published by a third party. Furthermore, the third parties lack al of the model and option package detail of all vehicles offered for sale today.
Brad – You give me a headache when you talk about that stuff. But I’m glad someone understands it, even if i don’t! My roommate in college was a math major and he gav me headaches too. He taught me there is a difference between math and arithmetic. You’re the science guy. I’m left with the art.
Bottom line: Brad’s stuff works!