Skip The Dealer: 'There's Gold In Those Jalopies'
CELESTE HEADLEE, HOST:
So we've been talking about selling off some of the clutter around your house for some quick cash. But let's think bigger here for a moment, bigger like as big as your car. November was actually a good month for new car sales. Analysts say the industry reached its highest point since prerecession times. And that means the supply pool for used cars is growing. So how do you get the most bang for your buck when you want to unload your old ride? Here to help us answer that is Roben Farzad. He's a reporter for Bloomberg BusinessWeek. Roben, welcome back as always.
ROBEN FARZAD: Thank you, Celeste. Always a joy.
HEADLEE: So let's start with kind of the typical situation, right. Maybe there's a family. It's time to dump that modest two-door sedan and get something a little bigger. What are the options when you're trying to get rid of your used car and you're planning to get a new car?
FARZAD: Well, the most immediate one is if you're at the dealership, you're such a captive audience. And it's such an unpleasant experience to begin with that, really, just to trade it in or sell to the dealer is super convenient, but you know it's an opaque process. The dealer - the guy who's working with you is going to shuttle in and out of his, quote-unquote, manager's office. They'll write a number down. They'll wring hands over it - oh, I don't know. I don't know. What you should know is, ultimately, they're going to extract $3,000 to $5,000 on average of profit margin out of this.
HEADLEE: On your used car?
FARZAD: Yeah, there's gold in them there jalopies, I like to say. But, you know, you can also donate it. A lot of the public radio affiliates you listen to are taking these cars off your hands, especially if it's a really old clunker and $700, $800 to get the tax write-off is of big value. You can sell it privately. But as you were just talking with your guest, Craigslist - Craigslist is a pain. There's a higher price that you can extract.
But the convenience of having to deal with people, of taking calls, of being home, of washing the car, of, you know, getting out the ketchup stains. And then there's a fourth option that's increasingly taking hold is consignment, which potentially is the best of all worlds. Where you come in with a middleman who is willing to surrender some of that fat profit margin, that you could drive a '55 Chrysler Imperial through - I have to say that - and willing to kind of meet you halfway. If you engage them, they'll dress up the car. They'll do the marketing.
FARZAD: And you get to keep more of it. And so there are many options. But increasingly, in the age of the Internet, it's harder for these used-car salesman to rip you off.
HEADLEE: All right. So since you mentioned consignment, we actually spoke with Michael Bor. He's the founder and CEO of CarLotz, which is a consignment store for cars based in Richmond, Virginia. And here's what he said about why the gap between what you get in trade-in on your car and what they eventually sell it for, why that gap is so big. Take a listen.
(SOUNDBITE OF ARCHIVAL RECORDING)
MICHAEL BOR: One, because it's a very opaque market. So most people don't know the true value of their vehicle. So a lot of times they just take the value that's given to them by the dealer, which would be huge mistake as far as the consumer's concerned. But also, when you trade in your vehicle at the dealer, they sell it to a wholesaler. The wholesaler will then take it to auction. Another wholesaler will buy from the auction. There's a truck transporting that vehicle for a hundred bucks, let's say. And then, ultimately, they're selling it to a final dealer who's going to retail it to you. And each one of those middlemen need to make a few hundred bucks in between. And so it's a very long supply chain and, arguably, very inefficient.
HEADLEE: All right. So, you know, I mean, Roben, you understand the way people are when they go in. It's already a hassle to buy a new car anyway. You just want to unload the old car. You didn't have a chance to clean it. And somebody - you know, somebody whispers to you, a friend, hey, you could get two-grand more if you sell this privately. And you say, I don't care. What's the incentive then for people to go through this whole process you're talking about of either cosigning it or selling it privately?
FARZAD: What's your tipping point? What is the value of your time? For somebody who's making $50,000 a year, if you look at it as, I could potentially pay myself a 10 percent bonus of what I'm making. Five-thousand dollars, you could have a trip to Jamaica. You can put that in your kids' 529. You could put it in a Roth IRA. But if you're talking about a really old clunker - and by the way, in this economy, people have been putting off purchases for so long and we're finally seeing animal spirits return to car buying.
And Detroit is having a great year. And people have been holding onto cars that are well past their useful life. They might be less motivated to use a consignment service. But having said that, there are so many new models coming out. Somebody who might want to trade up from a Vault to a Tesla, if you can get your hands on one. You're increasingly seeing, for example, the Amtrak Auto Train do such a brisk interstate business of people who don't have consignment services in their state that want to get them up the Seaboard. Or even paying college kids to mule them across states because of companies like...
FARZAD: ...Mike Bor's that you're going to see pop up more because these margins in the age of Amazon, in the age of eBay and Priceline cannot last. They're just too fat.
HEADLEE: You know, it's interesting that many people talk about the fact that local dealers - at least the dealer you're passing on your way to and from work or whatever - they actually make their most money off of used cars, not new-car sales. Explain why that is.
FARZAD: It's brutally difficult to do it in new-car sales right now because there isn't the information asymmetry or the opacity that Mike Bor talked about. Right now, you can order a $15 report on Consumer Reports that tells you - that did a regional canvassing of how much your dealer, really to the delivery fee, to the last $10, truly paid for that car. So you can walk in after having made a $15 investment and say, this is my price.
Go tell your manager if you can match it in 20 minutes, I'll take the keys from you. If not, I'm going across the street or I'm going two counties away. So these guys are leaning on their used-car profits a lot more where there isn't something as universal and as benchmarkable as a service from Consumer Reports where you really have to take them on an ad-hoc basis.
HEADLEE: And are people more likely to assume their car is worth less than it is? You know, the right side, driver's window - the right side, front window doesn't roll down smoothly, and they assume that then the car is only worth a couple thousand bucks. Is that typical?
FARZAD: In the heat of the pressure sale, they don't know unless they did their research coming in. That's why it helps to - if you can, if you have the time, if you have the stomach lining, separate the two transactions. Say, one, I'm going to go in and buy a new car, but I'm not going to be behold into that dealer because there's going to be a back and forth and we're going to have to volley the serve. And I don't want to have to - you know, they're going to get me one way or another. You have to know going in that these guys are not in it for charitable reasons.
That they're not going to turn around and be happy after just clearing a couple hundred dollars of margins. If they sell it at or close to cost on the new car, and then they're going to hit you for something upward of $3,000 on the used car. And so it might behoove you to do it privately or through consignment.
HEADLEE: What about if you did it at two separate dealers? Do you get a better deal if you sell the car at one dealer and you buy the car at another?
FARZAD: Yeah, but it requires more leg work. We've heard of CarMax, obviously...
FARZAD: ...Which has been hugely successful, AutoNation. There are places that will give you a better price. But still, they depend on that wholesale model of taking it off the seller's hands kind of as a convenience, and then capturing most of the margin themselves because they turn around, they detail the upholstery. They put in that new car smell. They fix the knobs. They vacuum it. They put the dressing on the tires. And they turn around and market it.
And they offer the convenience of one-stop shopping. You walk into a CarMax it's a massive lot. And a lot of these places offer extended warranties. So increasingly, you're going to see a pretty brutal competition between the consignment services, the new car dealerships, the big ones like the CarMax's of the world because $3,000 to $5,000 again is not incidental in the grand scheme of car business profit margin.
HEADLEE: It isn't. And we only have about a minute left here, Roben. But how much money do you investment to make the car ready? Let's say, I'm going to sell it either at consignment or privately. Is there a cutoff line at which it doesn't - it's not worth it anymore to investment to make the car look better or run better?
FARZAD: You have to tally how much your time is cost, how much your time will cost both dressing-up or souping-up or tricking-out that car. And two, having people over and dealing with a bunch of misfires and, you know, people who end up driving it around. I don't know. I'll call you back. I call you back. When you look at the fully-loaded opportunity cost of that and the actual out-of-pocket costs, it might not be worth it. But certainly, having done research for this that if it doesn't work out for me in journalism, I'm definitely going into used-car sales.
HEADLEE: I think you could probably talk a lot of people into buying used cars. That was Bloomberg BusinessWeek...
FARZAD: Is that a - wait, is that a compliment?
HEADLEE: That is a compliment. You're a smooth talker, Roben Farzad.
HEADLEE: You're a smooth talker and very convincing. Credible.
FARZAD: Oh, my gosh.
HEADLEE: I'm sorry. That wasn't meant to be an insult. Bloomberg BusinessWeek contributor Roben Farzad. Roben, thank you so much.
FARZAD: Yeah, thanks for nothing.
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