Four Appraising Principles for the Current Market

May 25, 2023

There’s an interesting shift in my recent conversations with dealers about their used vehicle inventories that seems relevant to share here.

While many of my conversations address how dealers are pricing their used vehicles in the current market, there’s more interest on the part of dealers to tighten up how they appraise and bring in cars to achieve better outcomes.

The interest flows from a couple factors. First, used vehicle acquisition has become a more challenging task given the lower overall supply of used vehicles (particularly late model units). Second, wholesale prices have remained stubbornly high, most notably in auction settings where dealers (and rental car companies) are looking for inventory. Third, many dealers are at least attempting to source more inventory directly from customers through their service lanes, buy centers, lease returns, private party listings—basically anywhere they can find vehicles outside of trade-ins and auctions.

The dealers are asking how they can tighten up and potentially standardize the way they appraise vehicles against the backdrop of current market conditions and multi-channel sourcing environment. You might say they’re waking up to some of the appraisal inconsistencies I wrote about earlier this year.

The conversations have helped me distill what I’d consider four broad principles that can help dealers improve how their buyers, appraisers and managers bring in cars. Here’s a look:

Principle 1: The best way to get into a car is to know how you’ll get out of it. Almost everyone in the car business has at least heard this statement. The industry’s come a long way from the “old school” way of appraising cars, where you pay what you pay and apply your mark-up. The “retail-back” approach is more the norm now, but it has pitfalls. The most notable hitch relates to how appraisers effectively use a self-serving exit strategy, where they either adjust a vehicle’s competitive ranking or Price to Market percentage to allow paying more for a vehicle. Today, however, there’s a better way to ensure appraisers and buyers can see a vehicle’s proper retail exit as well as a target amount to bring in the car. ProfitTime GPS provides dealers a recommended retail exit price range, as well as a recommended appraisal range to minimize an individual’s ability to manipulate a vehicle’s true retail exit, which should provide the basis for evaluating and bringing in every vehicle.

Principle 2: Narrow the variances among appraisers. At many dealerships, it’s common to see differences of 10 percent or more across the acquisition Cost to Market percentages among appraisers. The variances owe to individual beliefs and biases, as well as confidence among appraisers that they know best how much a vehicle is worth. The aforementioned, strategy-tied appraisal and pricing recommendations from ProfitTime GPS offer a more uniform way for individual appraisers and buyers to at least start appraisals from the same place, and then pivot if they must.

Principle 3: Never second-guess an appraiser on a single car. This principle comes from personal experience. I can’t count the number of times I pointedly asked appraisers at my dealership, “What in the world were you thinking on this one?” I rarely got a satisfying answer—a fact that reflects the highly circumstantial nature of every appraisal. A better way, I now understand, comes from assessing appraiser performance across multiple appraisals, which helps you coach through the beliefs, biases and bad habits that result in letting the customer with the right car walk, or over-paying for the wrong car.

Principle 4: Measure appraiser performance against your strategy. One of the most encouraging things that’s emerged from the data science that drives ProfitTime GPS is the ability for dealers to establish a strategy for appraisals, give appraisers and buyers targets to start every appraisal, and then measure performance against the strategy. You can’t get this level of performance insight when you rely on Cost to Market or Look to Book benchmarks alone to measure and manage appraisers, especially in today’s multi-channel inventory sourcing environment. Today, it’s imperative that dealers set (and adjust) their appraisal strategy appropriately across individual sourcing channels and measure performance the same way. In the end, appraisers and buyers have clearer expectations of how they should handle cars in each channel and, better still, they know your oversight isn’t arbitrary.

I should add that deploying these principles and following them consistently across appraiser and buyer teams isn’t a cake walk. In some cases, you’re undoing a deeply entrenched way of appraising and pricing cars, and you’re shining a light on appraising practices that some may not want dealers to see. Even so, dealers who are disciplined about following these principles share an encouraging trajectory. Not long after the effort’s underway, they see less debate and friction over appraisals and retail pricing for properly appraised vehicles. Instead, there’s far more discussion around the benefits that occur when a larger share of vehicles arrive in inventory “on strategy” across every channel and then retail when they should.