Bark's Bites: Where Do Used Cars Come From?

Mark "Bark M." Baruth
by Mark "Bark M." Baruth

Not all used cars are created equal.

Used cars have become somewhat commoditized in the last five years, thanks to the rise of pricing tools and third-party advertisers, but there’s still some truth behind the old school notion that every used car is a unicorn.

While most car dealers mean that each car is unique in its mileage, color, trim level, and condition, there’s one hugely important factor that most dealers would prefer you ignore: how they obtained the car.

Each car on the lot has its own story, and knowing those stories might help you figure out if you want a particular car to become part of your life story.

Used cars arrive at dealerships in a number of different ways. Let’s look at each one and learn about the path a car ultimately takes before being marked for sale.

Trade-ins

Every dealer would love to get more trades, but most dealers aren’t particularly good at acquiring them. While a dealer should have a goal of taking in about 50 to 55 percent of the trades they evaluate, in reality, most dealers are closer to 30 percent or below. The reason? There’s nearly always a large delta between what the consumer thinks his trade is worth versus the real wholesale value of the trade (or what a dealer could sell it for today at auction). The average dealer is not good at explaining this difference to a customer, which immediately causes a high-stress situation.

In fact, most dealers don’t have anything like a “trade-in process.” Smaller dealers, in particular, are likely to have “a guy” who’s been in the business a long time who specializes in putting a number on a car. Problem is, the “guy” makes mistakes. Not that often, perhaps, but when he misses on a car, he’s likely costing his dealership a couple of thousand dollars. I’ve had trades evaluated at stores like this, and the “guy” almost always misses things like worn tires and brakes, defects in the interior, scratches in the paint, etc. I had one guy swear to me that my Boss 302 needed new brake pads and rotors, just because my brand-new Hawk Blues squealed.

Bigger dealers tend to live and die by their pricing tools when evaluating trades. These are expensive pieces of software that evaluate all the similar inventory within a predetermined radius, as well as recent auction pricing. While this is certainly a more scientific way of doing things, there’s a lot left to be desired about this method, too. Aftermarket equipment is almost never considered, and trim level isn’t typically weighed as heavily either. A “value price” or “one-price” store typically looks at what price it will take to be the most competitive in the market, subtract their reconditioning cost and desired profit margin from the sale, and — boom — there’s your offer.

What’s reconditioning cost, you may be asking? That’s the amount of money it will cost a dealer to bring the trade up to retail standards. At most reputable dealers, that includes brakes and tires at a minimum, but it certainly doesn’t have to mean OEM-spec tires and brakes, and often doesn’t. I often enjoy walking the lots of high-end exotic dealers in Florida and checking out the absolute garbage tires many of them put on $100,000+ cars.

Dealers love trades because they don’t have to pay auction fees or transportation costs, but sometimes the reconditioning costs can be higher than they’d like. Also, at any lot that specializes in sub-$10,000 inventory, a lot of the trades coming in are “junk cars” that will go directly to auction, which can be a hassle.

You should love trades because they should, in theory, be priced a bit less than cars acquired through other methods, and the service history might be easier to get, especially if the car was originally purchased and serviced at that dealership.

Off-Lease

I’m telling you, man — the lease bubble is about to pop in a big, big way. The market simply cannot sustain the amount of residual puffing that the captive finance arms are doing now. There is going to be an absurd amount of lease return vehicles coming back into the market in 2016 and 2017, and the banks have to do something with them. Their financial struggle could be your gain, if you play your cards correctly.

Off-lease cars typically fall into one of two categories — either abused and treated like crap by their “owners” because they knew that they weren’t going to keep the cars for very long, or meticulously maintained (because maintenance was included in the lease price) and driven a low number of miles. I don’t think that it takes a rocket scientist to figure out which is which, but you’ll want to do your own inspection.

Dealers love leasing because it gives them a chance to sell a new car to a customer every 24-36 months, and they get some fresh, late-model, certifiable inventory to sell. Certification can be a love/hate relationship for a dealer, but that’s another topic for another time.

There’s almost always some serious recon to be done on a lease return. Nobody ever replaces tires or brakes on a lease return. Therefore, while the cars might be in good condition, you may end up paying a price premium for a certified lease return.

Fleet Cars

Ever notice that there seem to be a ton of 2014 and 2015 model year used cars on the market? Who on Earth buys a new car, only to sell it a year later? I used to wonder that … until I learned about fleet cars.

The vast majority of those late-model domestic and Korean cars (and, increasingly, Toyotas and Nissans) that you see on dealer lots are purchased directly from rental car agencies. While this might be setting off all sorts of red flags and danger signs in your mind, it doesn’t necessarily mean that the car has been abused (although it can certainly mean that). I have some friends who work for rental car companies, and they’ll swear up and down to you that rental cars are maintained better than any personal vehicle you’ll ever see. After all, they’re checked out weekly to see if any maintenance is required, including fluids, belts, tires, etc. As somebody who rents over thirty cars a year, I can tell you that it’s incredibly rare for me to pick up a rental car and have something be amiss. (Notable exception: I recently had a Jeep Renegade with a broken power driver’s seat. I didn’t notice because I was the same height as the previous driver, but my 6’4″ valet at Ink48 had major issues.)

For that reason, dealers love to buy rental cars. They don’t have to put much reconditioning money into them, and those vehicles tend to be well optioned (forget the old-school “rental specials” as most rentals these days are at least mid-level trim) and in easy-to-sell colors. However, there is a big downside for a dealer, which is that these cars are incredibly commonplace. It’s difficult to convince customers that the seven 2015 Impala LTs that you have are in any way, shape, or form different from the ones that the guy has across the street.

That means good news for you, because if a dealer is buying fleet cars, he’s got to be competitive on price, which means that you can work a great deal on a low mileage, late-model car. If you really find yourself fancying an Impala, Malibu, Fusion, Town and Country, Altima, Sonic, etc., then there’s no reason not to check out a fleet car.

The Auction

Ah, the auction. If you’ve never been to one, you should try to find some way to do it. It’s a pretty cool scene. However, if you really like cars, you might find it disturbing to see them being treated so differently as they pass through the lanes.

The auction is the bane of many a dealer’s existence, a necessarily evil that he must endure because he can’t trade for enough cars to stock his lot. And there aren’t a lot of belles of the proverbial ball passing through the auction lanes, either.

Why? Well, a car typically ends up at auction for one of three reasons:

  1. It’s an off-make, and the dealer doesn’t typically do well with those — meaning that a Chevrolet store traded for a Lexus, and they can’t move them. That’s not such a bad thing, although it’s rare. A lot of those cars simply end up getting moved around dealer groups or sold to friendly stores.
  2. It’s one of the previously mentioned “junk cars.” The dealer can’t or doesn’t want to put the necessary money into reconditioning the car, or it’s super high-mileage and/or dated.
  3. It’s a car that the dealer can’t sell after months of trying. This is the most common reason for a car to be auctioned, and it’s also the most disturbing. Think about it: a dealer is so desperate to get a car out of his inventory that he’s literally willing to take whatever somebody will give him for it at an auction. That’s not good.

In recent years, especially since Hurricane Sandy, auctions prices have been very, very high, as used car inventory becomes more and more scarce. That’s not good for either the dealer or you, the consumer. If a dealer picked up a car at auction, it’s likely out of necessity. He probably overpaid for it, paid an auction fee, paid to have it shipped, and he might have discovered that it needed additional reconditioning work once he got it back home.

If I were you, I’d probably try to avoid auction cars. Luckily, this can easily be determined on the third-party vehicle history report of your choosing. There’s not a lot of win for you on an auction car.

There you have it, folks. While there are certainly some other ways a dealer can take in a car, these are the most common. If I were you, I’d shop for cars in exactly the order that I described them: Trade-in, lease return, fleet, and auction. A vehicle history report should help you identify each type, and it never hurts to ask the dealer to provide as much history as they can about the car. If what they tell you doesn’t match the history report, well, that’s a good indicator that you’re dealing with a shady character.

Good luck, and good hunting.

Mark "Bark M." Baruth
Mark "Bark M." Baruth

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  • PentastarPride PentastarPride on Jun 09, 2016

    I only buy used via private party and that will never change. I could be a millionaire and I would still buy used. Cars depreciate from day one (unless it is a Toyota/Lexus/Honda/Acura, because the fanboys and dealers believe that these cars are good for eternity, so to them there's no difference between 0k miles and 60k miles and its priced accordingly). Just because I buy used does not mean I am not picky. I will only buy one-owner cars. I aim for cars that are three to five years old. I require a reasonable service history as a condition of sale, and it must have no accidents (at least not a repair requiring anything more than cosmetic work). My 2013 200 Limited was purchased in cash, in full for $13,500 with a liyyle over 20k miles. It was sold by an elderly lady that needed a vehicle a little higher up off of the ground like a minivan or crossover. I have a current warranty through 2019 (regular plus an extended warranty puchased by her) and saved about $3k buying used from a dealer and about $6k buying new. I also pay myself a car payment. I have been contributing to this fund since I worked in high school. I have never had an auto loan and I intend to keep it that way. On the other hand, my wife does buy cars new (though she paid roughly 30 percent down on her 2016 Outback to shorten the term). At my current rate of savings I will have approximately $50k to play with from my car fund in ten years. Of course, I won't be using it all on one car--at most, I'm willing to spend $20k max. I keep the remainder in this account.

    • Cactuar Cactuar on Jun 11, 2016

      You remind of the the folks described in The Millionaire Next Door. PS: That's a good thing, keep it up :)

  • Felix Hoenikker Felix Hoenikker on Jun 10, 2016

    Pentastar, In your searches for used cars, have you run into curbstoners pretending to be the owner?

  • Mgh57 I should just buy an old car where everything is analog.
  • Fred I've only had it for about 7 months and I like it. Mostly because I have a hard time seeing my phone screen. So even tho my Honda's screen is 6" it's a lot easier to see than my phone.
  • Cha65697928 I'm 48. Both our cars have it, I'm never going back. Being able to activate calls, messages, music, nav, opening/closing garage doors all via voice command is awesome. Now if Audi would just allow Google maps to mirror in the middle of the driver's display instead of only allowing the native nav...
  • 3-On-The-Tree Totally Agree War is total hell!
  • SCE to AUX JFK used to pronounce Laos as "lay-oss", so I want to call this car "tay-oss". But I'm told by a true VW lover that it's pronounced "ta-owse", rhyming with "house". Maybe VW should rethink a few of their product names.
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