I also considered the same cars when I bought my 996 a while back. The m3 definitely is more nible because of the lack of weight as compared to the m5.

However after driving the 996 the m3 was no where near the 996 in handling stock imho. I made the comparisons back to back through the canyons, so I think you can't get a better comparison at least for myself. I did like many other features of the m3 but the handling just sealed the deal.

 

e39 m5 = carbon build up... $8500 worth of repairs not warrantied by bmw.. go 996

 

ouch. Yes that is the other deciding factor- namely that BMW warranties are only as good as your tenacity. They love to try and not warrant everything! I had an e34 m5 that blew a head gasket not only during just normal driving but while under the original warranty and they would not warrant it stating abuse!!!