Trade-Ins Are A Dealer's Big Profit Centre

Published in CarSmart Eletter, Written by Viraf Baliwalla, 2015-12-01

Buy low, sell high. That's the mantra for investing in the stock market. However, car dealers also make a big chunk of their profit using the same approach. This article discusses how dealers get their inventory, how they make their money on trade-ins and how you can get top dollar for yours.

Dealers get their used car inventory from a variety of sources: wholesale auction, wholesalers, leasing companies, rental companies and trade-ins. The following paragraphs identify how each source works.

There are often many layers in a vehicle transaction. Each layer generates a level of profit which then drives the end price of the vehicle up. The biggest way to save money on a car is to try to buy a vehicle that has very few layers in the transaction and cuts out as many layers of middlemen as possible. The best way to get top dollar for your trade is to try to get to the end consumer that will ultimately buy your vehicle with as few layers as possible. You'll get more, they'll pay less and everybody, except the middlemen, wins.

A wholesale dealer auction is a company that provides a venue for buying and selling vehicles within the auto trade. Dealers, leasing companies, rental companies and others operating in the industry put cars up for sale. Other dealers , wholesalers, exporters, garages and other industry players bid on vehicles on an as-is basis. The highest bidder wins. As professionals in the business, dealers are expected to buy the vehicle without a thorough mechanical inspection, repair any deficiencies and then sell the vehicle to the public at a profit. Often there are unexpected deficiencies that show up after purchase and those repair costs are borne by the dealer and passed on to the consumer. The auctions charge both buyers and sellers a fee to handle the transaction.

Wholesalers are middlemen that buy vehicles from one dealer or auction and sell it to another dealer, making their money on the difference. Wholesalers are not allowed to sell to the public unless they also have a full dealer's license. Unlike retail dealers who could make upwards of several thousand dollars in profit on a vehicle, wholesalers don't usually make high margins. They make their money based on volume.

Leasing companies typically dispose of their lease returns to help fund the acquisition of the next batch of vehicles they will lease out. They have made their money on the payments charged to lessees.

Rental companies like Hertz and Enterprise are high volume purchasers of vehicles. A rental is simply a lease for a very short period of time. After so many days of being rented out, the rental company has made their money back and more. Once a vehicle hits a certain age or mileage, those vehicles are typically sold back to dealers or put through the auction.

Public auctions are very different from dealer wholesale auctions. Although the auction process is similar, the selling prices tend to be retail prices, which are higher than dealers would pay.

In all of the above situations, professionals are competing for access to vehicles. This competition drives prices up and these increases are passed on to the public. However, with a trade in, there is no competition. Most people negotiate the price of the next car and once agreed to, they are at the mercy of the dealer to provide a competitive trade-in price. Dealer gross margins on the trade will typically be much higher than buying through any other industry source. These margins also have to allow for the possible layers of profit as mentioned above if the dealer decides not to sell it on their lot.

Here are two of several possible scenarios:

• a dealer may not want to keep the vehicle as part of their inventory so will sell it to a wholesaler. They will call their wholesaler for an offer. The wholesaler may say $4,500 but the dealer tells you $4,000 and quickly flips it for a $500 profit. The wholesaler may then turn around and sell it for $5,000 to another dealer who will then retail it for $8,000-$9,000 (these figures are for demonstration purposes only), or

• a dealer believes the vehicle is desirable for their clientele and keeps it on the lot to sell to the public. Since the market will bear $8,000-$9,000, they can maximize their profit by offering the same trade in value, cutting out the middlemen and selling it directly to the public.

So how can a consumer get top dollar for their trade? There are a few options. You can sell it yourself through websites like AutoTrader, Kijiji and Craigslist. Or, you can deal with a dealer that consigns vehicles. In either of those situations, you will not get the sales tax reduction associated with trading your vehicle in so you have to calculate what impact that will have and determine whether it is worthwhile going through the extra effort of selling on your own.

Alternatively, some vehicle brokering services can offer you the best of both worlds. They will arrange the trade in with the dealer who will sell you the car. This lets you save the sales tax. They will then buy the vehicle from that dealer at the same price and resell it on your behalf, typically providing some level of profit sharing. In so doing, they are undertaking the risk by paying for the vehicle and carrying it until sold, hoping there is adequate profit to provide both you and them with a reasonable return on investment. The amount of profit sharing one gets has to factor in that risk. However, even a little extra is better in your pocket than someone else's.

Viraf Baliwalla is President of Automall Network, a car brokering service based in Toronto, Ontario. Automall Network is a licensed dealer however does not operate like a dealer, they work for the buyer to help them save on their next vehicle and get more for their trade-in. They offer both a consignment program and a trade in profit sharing program for their clients within a reasonable distance of Toronto.

For media inquiries, contact Viraf Baliwalla at (416) 249-5474 x303 or [email protected].