By on October 6, 2012

Does retail always give you the best return when it comes to cars?

The reflexive answer is ‘yes’. But the real answer is ‘It depends’.

I’ve seen cars bought at dealer auctions that don’t have a chance in a felon’s hell of reclaiming their outrageous price. This week there was a Barney inspired purple 1998 Dodge Caravan with 118k that sold for $3000. That one will have to be financed to a hardcore Prince fan with a brood. A little while back I also saw this Farley inspired van go for $5850. That one is still at the dealer’s lot begging for monetary penance. Of course, these two extreme examples are somewhere between a lightning strike and a snow flurry in Atlanta.

So what’s the norm?

If we’re looking at cash purchases for new cars, the public with rare exception pays a premium over cost.

Most new vehicles sell somewhere between a 1% to 10% premium in the retail markets. But even then the dealers often have to factor out the pigs that simply sit, and this is not always cut and dry. The popular brands will offer a few lackluster models and sometimes an errant option package or two.

The declining ones offer the most prolific of pointless plentitude and will sometimes have a net negative return in the end. In a recessionary market almost everyone has headaches and migraines. But the general public with finance companies in tow offer all the medicine needed to treat it.

Then you have the near-new vehicles. One to three year old models. Again, new car dealerships that benefit from strong CPO programs will come out well and the laws of demand and access are still firmly on their side.

A new car dealer has access to closed auctions where only new car dealers of that brand can pick and choose. The manufacturer will usually offer these vehicles at a lower price before offering an ‘open auction’ to the independent dealers.  Online inventories are also available to virtually all by the manufacturer du jour. If a car is unique in the market place or attracts a truly affluent clientele (Subaru and Acura are two good examples), they won’t have as many repossessed offerings, fleet lease (Hertz, Avis, etc) or program cars.

Once the three year mark is past the field of choices widens considerably.

On the demand side, two diametric extremes generate the strongest price premiums from the public. The first are used car superstores. Carmax is a good example of this, and yes, access to financing sources for every ‘superstore’ plays a huge role in their success. Many of the larger firms will self-finance and sell their portfolio as asset backed securities (ABS) in the financial marketplace.

The same is true for the buy here – pay here dealers. However in their model the cars are more varying in quality, and the standards of practice are anywhere from saintly to satanic.

Virtually all of them will use some variation of a GPS or disabler to keep track of their vehicles. Some will work with the financially insecure in times of trouble, as does those superstores we mentioned earlier. Others will pull the rug out after one or two missed payments.

In practice, there are those who want a happy customer and referrals. Others have an army of attorneys (and repo men) to secure their real interests. Unfortunately it’s very hard to judge the BHPH dealer from their cover.

In addition you have the lower end models called ‘sleds’, the salvage vehicles, and what I term the ‘scratch and dents’. Sleds are generally vehicles that would retail for $5000 or less. Although this area also represents ‘finance fodder’ for smaller independent used car dealerships, many larger dealer groups are surprisingly becoming the stronger presence.

A lot of dealers are also simply not very good at the picking and choosing of used cars. Many may try to hire their own buyers or do it themselves. But more and more are resorting to experts who are simply looking for a flat fee for their services.

It’s also not a pick and flip. Most wholesalers these days will have their own mechanics, body shops, detail and recon crews, as well as their own vehicle transport. The standard practice is to sell the good ones, fix the mediocre ones, and resell the unpopular and/or crappy cars at the public and dealer auctions. The larger operations will sell hundreds on a monthly basis.

Wrecked and salvage vehicles, with rare exception, get the best returns at salvage auctions.

Insurance Auto Auctions and Copart are the two 800 pound gorillas of that industry with over 150 locations and nearly four million vehicles between the two. Yet, there are also plenty of independent salvage auctions that continue to do well due to the high fees of both groups.

When a car is worth more dead than alive a salvage auction is where the car will generally go. Sometimes it will be taken apart. Sometimes it will be rebuilt and sold locally… and sometimes they will be exported. The final option has become increasingly popular due to the declining value of the dollar.

Finally, we have what are called the ‘scratch and dents’. Generally they’re older vehicles that have susbstantial cosmetic or mechanical defects that keeps them from being retail ready. These are generally sold to the handy and the ignorant.

Public auctions are usually rife with these vehicles and it takes a strong eagle eye, along with a lot of patience, to find the right deal.

I have personally done well at public auctions due to plenty of practice… and the fact that most public buyers at these sales are generally tapped out at two grand. A lot of the cars that I finance for a premium come from this source. Certain wholesalers will also take part at these auctions. If you’re in the periphery like me, you have to pick your battles and make your friends aware of your involvement.

One other thing. County auctions are pretty much their own animals.

I’ve seen great deals with small city government sales… and the exact opposite at large county sales. The more taxi cab companies that come to the sale, the higher your Crown Vic will be. And the more rural folk that come to the sale, the higher your pickup truck will be. Buses are almost exclusively bought by exporters, transit operators, and in the case of scrap… auto recyclers.

Motorcycles and various powersports are their own specialized niche, and the impound auctions (Abandoneds, DUI’s, drug siezed, expired tags) are their own creatures as are the ones offered by title pawns and larger dealer networks.

Overall, if you’re going to do well as a buyer I would advise you to follow the advice of Wee Willie Keeler and, “Hit em’ where they ain’t.” Competition is always an expense at an auction. No matter where you buy and who you know.

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16 Comments on “Hammer Time Remix: Happy Returns!...”

  • avatar

    I did buy one car through CoPart(ridesafely) when their fees were only $300. I can’t justify $1,000 fees when the car needs lots of TLC. EBay is the best bottom feeder if you have the patience with no fees for the buyer. I’ve bid againist who were bidding on multiple cars at the same time :)

  • avatar

    Have a son who used to go to these auctions weekly. He picked up a couple cars for me and always did well. I would have been lost there if left to my own devices.

  • avatar

    About a year ago my best friend and I were within inches of quitting our jobs and starting a used car lot in the Salt Lake area. After doing our homework we decided to keep our jobs and partner with an existing cash and carry dealer part-time instead so we didn’t have to carry the overhead burden.

    After a few months of wholesaling, I’m thanking my lucky stars that I didn’t jump in with both feet! My buys so far:

    2011 Nissan Versa (former Hertz fleet) –> $75 profit…after sitting for 2.5 months.

    2000 Honda Civic –> $750 profit, quick turn-around.

    1999 Subaru Outback –> Would have made $900, but wait! After a week the check engine light comes on, missing on multiple cylinders, low-end rebuild needed. Damn…

    I’m still learning how to make money at this, but cars sell so close to retail at Manheim that it’s proving very tricky.

    Any advice?

    • 0 avatar
      Steven Lang

      I have been at the Manheim sale in SLC several times.

      When I was there, the prices were pretty much right at California levels. The late model prices were high, repossessions were few, and a disproportionate number of those were in ‘clean’ condition.

      The competition there was tremendous.

      My advice is to go to independent sales, read the legal notices, and don’t buy about 90% of what you look at. Start by buying one vehicle at a time and stick to a few select models. That way you can build on your knowledge base and develop a sustainable advantage over your competition.

      Good luck.

      • 0 avatar

        Thanks Steven. One more follow-up question: in your opinion would it be worthwhile for me to travel to Las Vegas or L.A. to try to get better deals? Or would the cost of travel and transportation eat up my profits?

      • 0 avatar
        Steven Lang

        It depends. If it were me, I would look at prices at less popular auctions before going out of state.

    • 0 avatar

      As someone who operates more at your volume level, I can echo some of Steve’s advice. I don’t do this for a living, as something on the side.

      I stay away from problematic models (experience as a mechanic is valuable here) and only bet on a (relatively) sure thing.

      Subarus, Volvos, Audis and other expensive to repair oddities are poison to me unless it’s truly a super clean dealer queen at the right price. As you found out with the Subie, a couple repairs will eat you alive on these beasts.

      Cavaliers, Cobalts, Civics, Focuses and Corollas are a good bet for a quick flip, but if the auction is crowded, they almost always sell for too much. Keep an eye out for weird color and option combos. As the price gets cheaper, the options matter less and less.

      I find if you buy something with a decent track record that has no red flags upon inspection, you’ll generally do OK. GM 3800 cars, Ford pickups that don’t have a 5.4L 3V, Vulcan Tauruses (and later duratecs) banger Camrys (if you can score them), later model Town Cars, and any semi-decent econo car with a motor not known for implosion are generally safe bets.

  • avatar

    I once attended a county auction, it was a complete waste of time, in terms of finding a car worth buying, but fantastic for entertainment value.

    The ad in the newspaper….yes this was pre-internet….stated, “Cars from $25 and up!”. Yup, there were lots of $25 cars, one had a small tree growing out of the defroster vents. The $25 dollar cars were bought by scrappers, and loaded onto car carriers for their final trip to Mr. Crusher.

    They did have an impounded Corvette of late seventies vintage. The felonious fellow who had been operating it, seems to have been distracted by the police who insisted on having a word with him, and he crashed it into a pole or fire hydrant. While the car was repairable, it wasn’t worth much. To my great amusement, I watched as Beavis and Butt-Head battled it out over this wounded malaise era Vette. The final price was more than what a similar Vette in running condition would have cost.

    Were there any cars worth buying otherwise? Yup, except not a single member of the general public was allowed to bid on one. When the bread and butter cars came up for auction, mostly ex-county vehicles, the auctioneer opened and closed the bidding before anyone could get a second bid in. Seems that 3 fellows attending this auction bought all those cars. One good citizen attending the auction became enraged, and called the county police. The county police told him to leave ASAP, or he would be arrested for being disorderly.

    It was the first and last county auction I ever attended.

  • avatar

    Pittsburgh used to have an independent auctioneer who was open to the public. It handled the majority of the cars in Western PA. It really wasn’t all that inconvenient to get to but the owners knew they were sitting on a cash cow so they sold out to Manheim a few years ago. I haven’t a clue how much but I’m guessing double-digit millions to sell out. Now since it’s a closed dealer-only auction it has made it essentially impossible to buy anything like that.

    EBay is really the only option left for the cheap weekend car that you don’t mind wrenching on. I’m still tempted every so often to peruse them and pickup something 2-doors for kicks. But I know better or in other words: I don’t have the time to fix that cool 3000GT/Used up 911/Mid-90s Mustang/Camaro/Firebird.

  • avatar
    Nicholas Weaver

    “Competiion is always an expense at an auction”

    Its simply the Winner’s curse in action. The more bidders in an auction, and the less savvy the bidders, the increased likelyhood that the winning bidder overpaid.

    In fact, in an auction, the more bidders who participate, the lower your bid should be. If you only are dealing with savvy bidders, they will do the same. If not, the ignorant win and you might as well go home before things start.

  • avatar

    Participated in a government (school district) sealed bid auction once. The $500 cars went for $750, the $1500 cars went for over $2000, and two 90s Broncos with “OJ Simpson white paint” went for double what they were worth. I only bid what I could aford to loose which means I walked away with nothing.

    Most of the bidders were owners of local bottom tier used car lots.

    The only deals (and I use the term loosely) were a non running 1987 Dodge Diplomat and a non running 1988 Caprice that went for about $150 a piece. I saw the Dippy a few weeks later in running condition with a $900 price tag. Still see it around town. Should have bid $200 for it.

  • avatar

    Probably my best auto buy to date was at a city abandoned vehicle auction in 2005. I got a 99% rust-free 1983 Thunderbird TurboCoupe for $120. The TC nose was gone, looked like a deer-strike repair to get it back on the road. I put used wheels, and new tires on it, along with some spark plug wires. It has been remarkably trouble-free until the heater core blew a couple months ago. It’s getting cold and I’m not looking forward to that job.

  • avatar

    Thanks Steven. That’s an interesting view into the used market.

  • avatar
    Athos Nobile

    English slang is usually a beautiful thing. I think what you call over there a sled is a b-omb here.

    In any case, I usually have a look (online) at the clearing line in Manheim. The few times I’ve got there to check the actual cars, sometimes I’ve been surprised, others I regret having opened the car (and thanks my nose doesn’t pick many odors).

  • avatar

    Sometimes colleges and universities have their own excess material auctions / impound auctions.

    The only one I attended was a sealed bid auction in which I didn’t get any of the cars, trucks, or motorcycles which I bid on but I won a hell-ashishly ugly and large Hawaiian / Tiki style end table lamp that would have even made most of the 1970’s Brady Bunch family vomit due to it’s ugliness. I think that the lamp was swapped with the lamp I really wanted to win (a cool 1930s Bauhaus looking aluminum and glass desk lamp) by someone inside the auction. I would give my roommate a discount on a couch I sold to him in order for him to take the Tiki lamp too…

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