Auto Auctions: Prices Influence What You Pay for Cars
/ May 1st, 2006
The cars roll steadily through the auction lines, each one with a story. The blue minivan hauled kids until its owner traded it in. The silver sedan served business travelers as a rental car. The black SUV’s owner fell behind in his payments and had it repossessed. But the auction buyers milling around in blue jeans and windbreakers don’t care much about each car’s story–just its mileage and condition. Those issues–and the pros’ judgment about whether this vehicle will sell on the used car lot of the dealer who employs them–will decide if they raise their hands to bid. Though you likely never will attend one of these wholesale auctions–they are for people in the industry only–the prices paid at more than 100 auction sites around the country (and in separate online auctions) strongly influence what you may pay for a used car or what your trade-in is worth if you buy a new vehicle. Nearly 10 million used vehicles were sold through auctions last year, according to Manheim Auctions, Atlanta–the largest of such companies. About half those were sold by dealers–usually cars they took as trade-ins but didn’t want to sell as used cars themselves. Some 16% came from rental fleets putting newer cars into service, 13% from returns at the end of individual leases and 11% from repossessions–with a few other sources accounting for the balance. This ability of dealers to sell cars they don’t want to keep–and to buy vehicles they need on their used-car lots–makes auctions crucial to the used-car business. Data from auctions is a major source for price services such as Black Book, Kelley Blue Book, and the National Auto Dealers Association Used Car Guide. These services publish books and electronic products giving used car valuations and trade-in values. “The auctions we attend in person and follow online, plus the data we get from the auction companies, are the starting point for what we do,” says Ricky Beggs, Black Book vice president and managing editor. Most dealers consult at least one of these services in setting their trade-in values and retail prices on their used-car lots. Additionally, some dealers look directly at the auction prices they get from Manheim or other auction companies.
Because each auction site holds at least one sale a week, price reports from these sales are fresh. When conditions change, auction prices move quickly to reflect the changes. For instance, when gas prices spiked suddenly in the summer of 2005, the used value of gas-guzzling SUVs fell sharply. Dealers who felt that SUVs would be a hard sell on their used-vehicle lot stopped adding to their inventory. Even though you can’t attend, knowing how auctions influence used-car prices can help you plan your strategy to get the best deal whether you are buying a used car, trading your old car in, or leasing a new car. Let’s look at the specifics:
Get a top trade-in
Like the buyers at the auto auction, the used-car manager where you’re buying a new car cares most about the mileage and condition of your old car. Does it have exterior scratches, dirty upholstery, mildew smell? If so, the dealer probably will send your car to an auction–and that means he will give you less for the trade. On the other hand, if your vehicle is in great condition, the dealer may want to put it on his own used-car lot. That will mean a higher trade-in value. “It all boils down to the experience at a specific dealership,” says Beggs. “If you are trading in a Chevy Malibu in a color that has sold well on that lot recently, you will get a little higher trade-in.” (Fashions in color change. Silver recently has been the most popular, accounting for about one-fourth of new cars sold.) Whatever the color of your vehicle, you won’t get a lot more in trade than the price the dealer would have to pay for a comparable car at the auction.
If you’re ready to buy a new car, you probably can get more for your old one if you sell it outright rather than trade it in. But if that seems like too much hassle, at least research your trade-in value before you start shopping. Check Web sites like Kelley Blue Book or Edmunds.com to get a valuation. Be honest with yourself in rating the condition of your car–very few vehicles really qualify as excellent or outstanding. On the plus side, says Philip Reed, consumer advice editor of Edmunds.com, be sure about the equipment on your car. “People sometimes don’t know if they have ABS (antilock brake system) or traction control,” says Reed. “Those things add value, so be sure to check them in figuring your trade-in.”
Bargain for a used car
Dealers often aim for a markup of $1,200 to $1,800 on a used car they’re selling–whether they took it in trade or bought it at an auction. But used-car buyers have less information than new-car shoppers. With a new car, you readily can find the invoice price charged to the dealer at kbb.com, Edmunds.com, or other Web sites and start negotiating from that level. But you can’t really know what the dealer paid for a used car you fancy. So you need to see how his asking price shapes up with competitors. Before you ever head out to shop, go to Autotrader.com and look at advertised prices for comparable vehicles (look at the ads from dealers–prices from individual sellers will be lower since their vehicles probably are not as well reconditioned). Check the Edmunds “True Market Value” for the make and model you’re looking at. Then check prices as well in your local newspaper. The Edmunds price will be for your broad geographic region, but often prices are even more local.This ability of dealers to sell cars they don’t want–and to buy vehicles for their used-car lots–makes auctions crucial to the used-car business.
Get a low lease payment
Not only are returned lease cars a source of vehicles for auctions, the auction prices help determine the monthly payments of new car leases. In computing those payments, the leasing company–whether a bank or a finance company owned by an auto manufacturer–calculates the difference between the new-car price and an estimate of what that car will be worth at auction in two or three years–matching the term of the lease. So a model that holds its value well produces lower lease payments. For instance, a Honda Accord that holds 60% of its original value after three years likely will be a better leasing deal than a Chevrolet Malibu, worth 43% of its original value after three years. In all these ways, the wholesale auctions and other companies run influence your used-car price or trade-in value. But you may see ads in the newspaper or on the Internet for another kind of auction–one aimed at individual buyers like you. Some are billed as selling former police cars or government cars at bargain prices. But be careful. “It is buyer beware at most of these individual auctions,” cautions Reed. “You might find a bargain if you are very, very good at evaluating cars,” he says. But he adds that at these auctions you can start up but not drive the cars for sale. So it’s tricky to tell the vehicle’s real condition. Unless you have such semi-pro automotive skills, stick to searching the ads on the Internet. You’ll be able to take your time and are much less likely to wind up with a lemon.
Jerry Edgerton, author of Car Shopping Made Easy, has been covering the car beat since Detroit companies dominated the U.S. market. Edgerton specializes in finding the best deals on wheels and offering advice on making your car last.