Hammer Time: Tax Season

When should you not buy a used car? Try right now. From mid-February thru early-June, the auto industry goes through an event called tax season. Folks receive their refund checks from the IRS, which in turn creates a nice little bubble of activity in the used car industry. Which is a good thing. Except that bubbles always have nasty repercussions down the road.

Used car prices are now soaring into the heavens of ‘stupid money’ at the dealer auctions.

For example, these were a few of the returns at a recent Carmax sale.

2001 Honda Civic, 170k, 5-speed, LX: $4100

2002 Ford Escape, 214k, Cloth, XLT, $4000

2002 Buick Rendevouz CX, 129k, Leather $4100

1997 Honda CR-V, 207k Cloth, 4WD $3700

2000 Ford Expedition Eddie Bauer, Leather, 2WD, 156k $5100

1998 Mercury Sable GS, Auto, Cloth, 93k, $3500

Compared to only three months ago, I would estimate these cars sold between $700 and $1500 higher than what was then the market price. The difference is customers, and perhaps a bit of faith. A lot of the buy-here pay here- lots are pushing for a $1000+ down payment on these types of vehicles, and during tax season a lot of folks have the means to pay that type of money.

Even with a $70 to $85 weekly payment, these used cars will usually take anywhere between six to nine months to break even for the dealer. Up to a few years ago, the break-even point would have come several months beforehand and it was fairly easy to sell the note to a finance company free and clear. Not anymore. If you want to have a decent return you have to ‘tote the note’ and consider putting a GPS tracker on it.

The bad news comes for the cash buyer. Dealerships that used to be cash only are now migrating to the buy-here pay-here model, which means that price competition at the wholesale level is stronger than ever. Used car prices are now among the highest in the past decade in the United States. The supply of good cars has gone down considerably because consumers (who read Hammer Time) are keeping their vehicles longer.

New car dealerships are also retailing most of their trade-in’s instead of bringing them to the sales. Even the ones with salvage histories and prior owners who considered oil changes ‘inconvenient’, are given the retail ready thumbs up by the used car managers . That means a lot of dealers without a strong trade-in business are picking up a lot of bad vehicles at the auctions and trying to turn it over to you as quickly as possible.

What about the prior owner? A lot of the resourceful ones are getting their vehicles repaired instead of traded-in. If a 10 year old car blows an engine, installing a new one for $1300 seems to be a lot more reasonable than financing any of the vehicles mentioned above for the $5500 to $7000 range. Other folks who want less hassle are opting for leases, which compete directly with the buy-here pay-here dealerships during this time of year for the monthly payment.

You can get a good deal at this time. But it’s not so easy. A friend of mine recently had to travel two states north to find a 2003 Honda Element that fit his bill. Even with 170k miles, he paid nearly 8 grand for it. I have found decent deals at this time too. But usually it’s because I like older cars and keep up with enthusiast sites that focus on cheap fixes for seemingly major problems.

Knowledge is always the best weapon in the marketplace. Unfortunately this is the time of year when a lot of dealers come to the auctions with their sharpened knives of greed and avarice. Fine with me. This is the time of year I also sell my bad cars and let these enlightened souls carve up those turkeys.