Everyone has a certain point with their daily driver when they would rather see money back in their pocket, instead of seeing more money fall out of their pocket.
Time marches on. That old clunker loses it’s endearing qualities and then, what do you do?
Well, the answer depends a lot on what type of vehicle you’re trying to sell… which is why I’m introducing Carmax’s wholesale operations into this write-up.
A lot of us are already familiar with Carmax’s retail operation.
No-haggle pricing. No hard sells or bait-and-switch tactics. The foundation for what made Saturn such a successful new car brand back in the 1990′s has been refined, improved and eclipsed by Carmax.
Like em’ or hate em’, Carmax is now the official used car Goliath of the auto industry.
This article from Automotive News does a great job of highlighting the retail side of their success. Carmax is now twice the size of second-place Autonation, and larger than the third, fourth, and fifth place automotive retailers combined. If Carmax manages to stay on track with a forecasted 500,000 units sold for 2014, and maintains their $2,150 in net profit per unit, they will likely eclipse over a billion dollars in profits… just with their retail operations.
That first billion is the one everyone here is already familiar with. However it’s the other side of their business, the wholesale side, that’s proven to be the more consistent money-maker during good times and bad.
This is how it works.
You are tired of your car. More times than not, it has some type of problem that is either expensive or elusive. You have probably spent a fair penny trying to solve that issue, and even if you succeeded, you are weary of having to deal with yet another one down the road.
Enter Carmax. Have you ever noticed how much money Carmax spends on radio advertising? That little 30 second spiel about bringing your car in and getting treated right is more than just a hokey way of trying to get you in their door.
It’s arbitrage, with a churn that now numbers close to 7,000 vehicles.
Every… single.. week…
Carmax inspects your vehicle. Appraises it’s value. Successfully buys it (or at least plants the seed for further business), and then they does something that is unique to automotive retailers.
They have weekly auctions for all of these vehicles. Wholesale auctions frequented by dealers who sometimes travel long distances to buy the very same cars that you are tired of driving.
On average, a Carmax auction gets more eyeballs per vehicle basis anyone else. An auction with 100 vehicles will often have more than 100 dealers who are ready to bid up and buy all those vehicles.
It’s a free market, and because Carmax eliminates uncertainty by disclosing major defects to this dealer audience, they get a premium return for much of what they sell.
If the engine or transmission has mechanical issues. If there is frame damage or a salvage title, Carmax will disclose that issue in writing to all dealers before the sale.
Even if it’s a $500 vehicle, you can dispute the vehicle if there was a major defect that wasn’t disclosed. I’ve done it successfully in the past many times and so have thousands of dealers who attend their sales. No system is perfect. But Carmax’s selling policy is designed to eliminate those uncertainties and provide disclosure with both the high end car, and the beater car.
That’s where you, the public, comes into the mix. Because Carmax can get the premium return along with a seller fee of about $165 for each vehicle sold, Carmax can pay more for certain cars than other dealers.
What types? In my experiences, Carmax tends to offer a solid edge to consumers in three distinct areas.
1) The unpopular car with expensive mechanical issues.
2) The Craigslist nightmare car.
3) The “I need money right now!” car.
You may notice that these are the first two types are cars that few public individuals want to buy in the first place. That five year old Chevy Aveo with a bad automatic transmission, and a 25 year old Honda that looks like it got into a fight and lost, will have one thing in common.
They will both be lowballed by the general public. Once you put that Aveo online for $3000, someone will offer you $1500 over the phone and then not show up.
That 1990 Honda Accord which has been driven 356,168 miles? Someone’s kid or an aspiring scammer is going to light up your cell phone with a never-ending torrent of stupid pointless questions.
“Is your car a diesel?” says the guy who doesn’t understand that the letters g-a-s do not equate to d-i-e-s-e-l.
“Is there anything wrong with it?” “Is it an automatic?” “What’s the least you’ll take for it?” “Can you drive it to my place?” “Um… Give me your address!”
It’s this moron brigade that helps Carmax make hundreds of millions of dollars. By giving you the opportunity to not deal with them, and giving dealers the opportunity to capitalize on your automotive misery.
There’s also a more lucrative side for those dealers that visit these auctions. That Aveo I mentioned earlier? It can be bought for $2300. Then it will be fixed with a cheap tranny found through car-part.com, and then financed at $500 down and $260 a month for 36 months.
The sub-prime side of the car market can help a dealer more than double his money over the course of a few years. Not risk-free mind you, but the Carmax auctions provide them with a golden opportunity to buy 20 or 30 low-priced vehicles a week that actually come with mechanical disclosures.
Once you know what you’re buying and have the means to it marketable, your risk of failure goes down substantially. This, along with the push of immediate competition, motivates dealers to pay more money for your impaired vehicle.
Nobody else does this when it comes to cheap older cars.
The creation of a free market with thousands of used vehicles, and fair disclosures, will likely net Carmax well over $300 million in profits by the end of this fiscal year.
The average unit garners a little less than $900 in profit. Subtract Carmax’s seller fee of about $200, and you’re looking at only about a $700 spread on average between what Carmax will offer you, and what a large free market will pay for your vehicle.
Is that a better return than you will find on Craigslist, Autotrader, or a nearby car dealer? In some cases, without a doubt. The greater the uncertainty about the value of a product, the less an unknowledgeable person (or greedy person) will offer for it.
Personally, I would test out all of these avenues. If Carmax offers the best price, take it.
That is unless you live in northwest Georgia. In which case the address to my dealership is…