ProfitTime GPS in Practice: A Longtime Appraisal Problem That’s More Problematic

March 10, 2023

Every dealer would agree that you make your money when you buy a used vehicle.

That’s why appraisals are so critically important. The appraisal establishes the return on investment (ROI) and profit potential on every vehicle you acquire, based on an appraiser’s assessment of the vehicle’s condition and determination of how much to pay for a vehicle.

Unfortunately, as I noted in a recent post, the appraisal process in many dealerships suffers from inconsistencies between appraisers, both in how they assess a vehicle’s condition and in how they determine the optimal purchase price. In the post, I noted that I would address an aspect of the appraisal process that appears to be increasingly problematic for dealers—the inaccuracy of reconditioning costs appraisers apply to a vehicle they acquire for a retail sale.

To be sure, the accuracy of reconditioning estimates in appraisals has always been a topic of conversation, if not concern, among dealers. If your estimates don’t reflect the actual costs required to recondition a vehicle for retail sale, the car’s ROI and profit potential typically suffer.

But the problem’s never gone away and today, as dealers use solutions like ProfitTime GPS to establish investment value targets to guide how appraisers bring in cars, the inaccuracy of reconditioning estimates stands out as clear as a bell.

Here’s an example: During last year’s run of inventory scarcity, a Toyota store in a California dealer group determined that they would do everything they could to ensure they had sufficient used vehicle inventory to sell.  They set aggressive investment value appraisal targets in ProfitTime GPS to ensure they did not lose any potential acquisitions due to not stepping up enough to acquire the vehicle.

Early on, it was a counter-productive result from what they were trying to accomplish. What they found if you don’t have a really thorough evaluation and condition process in your appraisal. The tool works great if you’re putting the right recon and expense into that car. But if you’re not, it can be counter-productive when you’re aggressive in acquiring the store down and then you’re scaling the score down as a result, then you’re shooting yourself in the foot.

“It wound up being counter-productive,” the group’s director of operations shared. “What they found is that they didn’t really have a thorough evaluation of vehicle condition and they didn’t have the right reconditioning expense. If you’re off on recon by $1,500, and you’re getting aggressive buying cars, you end up in trouble as you scale it.”

The director adds that “cosmetics affected our misses more than mechanical. If you’ve got to shoot a couple panels and put a windshield on a car, it adds up quick. That’s a $1,000 bill in today’s market.”

After some “significant” issues with wholesale losses and gross profit, the store’s on better footing, the director says. It’s established less aggressive acquisition targets and focused more intently on ensuring appraisal estimates reflect the actual costs the vehicle will incur as it gets reconditioned in the service department. “It’s not 100 percent perfect but we’re missing fewer of the major issues that really burn you.”

Mike Boyd, who directs business development for vAuto’s iRecon solution, says the situation at the Toyota store isn’t uncommon. Across the industry, Boyd says that when reconditioning estimates are off, they’re off by an average of $300 to $500—a sizable chunk of retail gross that effectively disappears when the vehicle gets the reconditioning it needs.

Part of the problem, Boyd says, comes from appraisers using standard reconditioning estimates when they appraise every car. The estimates may have been established years ago and they no longer reflect the reality of today’s reconditioning costs, much less the work that really needs to be done on a specific car.

Therein lies an opportunity. As dealers move away from a one-size-fits-all strategy for pricing vehicles in today’s more variable market, they’ll need to depart from one-size-fits-all reconditioning estimates in appraisals. Now more than ever, success in used vehicles depends on having the right data to make the right decisions with every car.