4 Definitions of Fair Market Value: Don't Jeopardize Your Equipment Leases

How would you answer the question "What is Fair Market Value?" If your answer is "About 10%," you are only half right.

Fair Market Value of equipment is seldom "about 10%." Although many leasing salespeople tell customers that 10% is their best estimate of what they'll pay at end of lease.

Here are 4 definitions you should understand if leasing is a one of the ways you finance equipment additions.

1. Fair Market Value (FMV). No process defined. No parameters. Buyers beware. Read the contract and see what other options you have. Negotiate whatever the leasing company tells you.

2. Mutually Agreed to FMV. The leasing company determines the purchase price, not the customer. The lease agreement doesn't contain a process to determine the price. Some lessors may feel that "I am the leasing company and you're not. It's my way, the highway or worse." Worse may be a 12-month lease renewal followed by another FMV purchase option.

3. In-Place, In-Use FMV. This is tricky. Lessors may add extra costs not financed in the lease. If equipment requires added expense to install and de-install, such as rigging, site preparation, special electrical wiring, then these expenditures may be added into the now "not-so-fair market value" option.

4. Greater of Fair Market or 20%. The FMV may be more than 20%. If no process is defined, the price is usually higher than customers expect.

These four definitions are not the entire list of purchase options at lease end, but they are among the most overlooked and least understood. It's best to negotiate before you sign the lease, but if you don't, remember that all things are renegotiable.