Fair Market Value Purchase Option
A 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. 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. A fair market value buyout allows a customer to utilize equipment for a designated time, with options to continue the lease, return the equipment and upgrade, or purchase at the then-determined fair market value price. 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. The fair market value purchase option does not provide the purchase price in advance, but so 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.
What Is Fair Market Value Purchase Option?
A 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 so 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.
Understanding 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. A fair market value lease also is known as an operating lease.
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.
Fair Market Value Lease Facts
Related terms:
Capitalization
Capitalization is an accounting method in which a cost is included in the value of an asset and expensed over the useful life of that asset. read more
Capital Lease
A capital lease is a contract entitling a renter the temporary use of an asset and, in accounting terms, has asset ownership characteristics. read more
Closed-End Lease
A closed-end lease is a type of rental agreement that does not require the lessee to purchase the asset at the end of the lease. read more
Fixed Price Purchase Option
A fixed price purchase option is the right, but not the obligation, to buy a leased item at a price determined at the onset of the lease agreement. read more
Lease
A lease is a legal document outlining the terms under which one party agrees to rent property from another party. read more
Lessee
A lessee is a person who rents land or property and must follow restrictions and guidelines set by a lease agreement. read more
Open-End Lease
An open-end lease is an agreement that requires the lessee to make a payment at the end of the term to purchase the asset. read more
Operating Lease
An operating lease is a contract that permits the use of an asset but does not convey ownership rights of the asset. read more
Self-Employment
A self-employed individual does not work for a specific employer who pays them a consistent salary or wage. read more