Well to explain this at lenght would require alot of time. I will try and give the short version of this.
Lfs is the closest simulator to real racing as you can get today, but there are a few things that is not good at all/ or not implemented yet in the pyhsics engine that is essential to really complete the picture. If you take away tire, aero and the non existent undertray pyshics in the game. I would say they are pretty much spot on. Reactions to setup changes is overall very good, and that is something lfs developers should be very proud over, since it is difficult to get a real car to react correctly to setup changes.
Then there is better cars and worse cars in the game aswell. The worst car would be FZ50 and the two best car in my opinion that is closest to reality is FXO and FOX. However I belive that when tire pyshics gets done properly all cars will get alot better. I think that FXO and FOX just overcomes the difficulties of undertray, aero and tire pyshics better then the other cars right now.
The basic psyhic engine in Lfs is the best by far. Atleast that´s what I think. When all parts fall into place i´m sure no other game will beat it for a long time to come, atleast when it comes psyhics.
Regards
SDRA|Moby