The right way to value a retail car

April 29, 2009

Dale – I have been using your product as a working GM, GSM, and USED CAR DIRECTOR and another similar (not as good) product for some time now. You and I spoke by phone a couple of years ago about your philosophies on inventory as a raw potential asset rather than as a “car to fall in love with” and the conversation really helped open my eyes to the possibilities of the business.

The most interesting thing to me is that still today, most used car managers appraise based on “book values”. It seems fairly straightforward to me that if you start at the expected retail price based on your market sweep, bump down a bit to give yourself the competitive edge and then work backwards through negotiating room, gross profit requirement, packs, and recon, you can almost always come to a fair price for the trade that will prevent you from getting stale inventory. To do this properly, you have to balance your “wish” profit requirement against the realities of the market up front, but I find that it does help you be a lot more honest with yourself about real market expectations in terms of gross profit and days supply vs. dollar days inventory and so on.
Is anyone out there teaching this method? It solves 90% of the problems that lead to “water” on your lot.

What do you think?

Welcome to the exclusive club of enlightened appraisers. Check out my article below that was just published today in Dealer Pre-Owned magazine. You’ve got it right!

Consider this approach when valuing used vehicles.

The new efficient used car market place once again requires a new approach for valuing a used vehicle. In the past, our industry has valued a used vehicle for retail disposition based on its historical wholesale value. Today, I am firmly of the opinion that the value of a used vehicle intended for retail should be derived from its current retail market value, rather than its wholesale value.

For example, imagine that you are a seller of an 2007 Ford Explorer Eddie Bauer 4×4 with an automatic transmission. In your market, there are 42 of them that are identically equipped with very similar mileage. Based on a ranking of price, yours happened to be 38th highest out of the 42. The likelihood is very small that a shopper for this type of vehicle will appear at your store. If, however, your price rank was in the top 10, the likelihood of seeing a shopper would be much greater. If you agree with this premise, then you’re halfway there to understanding why buyers purchasing used vehicles based on wholesale values are dead wrong.

The reason they were wrong is that these vehicles were recently being purchased in the auction lanes in the high $17,000 to mid $18,000 range. So let’s suppose that you paid $18,000. After transportation of $300, reconditioning of $700 and a mere profit of $1,500, you would have to ask $20,500. The problem is that the average retail price of the 42 identically equipped similar mileage vehicles in your market was $19,200.This means that your asking price is $1,300 above the average and your competitive ranking would have been 38 out of 42. Considering the fact that there are 37 identically equipped similar mileage vehicles in your market available for sale for thousands less, how likely is it that you would sell this vehicle quickly? Not too likely. If you wanted to position yours in the 10th position, you would have to have priced it at $18,464, which would have been a $536 loser after transportation and reconditioning.

So I ask you, was the vehicle that you purchased worth $18,000? Well, yes, if you believe that a vehicle’s worth what someone is willing to pay in the wholesale market place, but clearly no if you have the more enlightened view that a vehicle in today’s transparent and efficient market place will only bring what the retail market will bear, and in this case that is somewhere in the mid $18,000s (top 10).

Resist temptation to pay extraordinarily high prices for vehicles just because the herd is doing so. Rather, purchase vehicles for amounts that will allow you to put a respectable profit on top of your acquisition price and still position the vehicle in the lower range of its current competition in the market. If it means that you can’t buy a vehicle that way, then let it go. It is a far better problem to be light on inventory that is owned right and current than to be heavy and long on inventory waiting for the market to come around.