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Old 10-16-2008, 08:34 AM
Status: "Back to the grind" (set 20 hours ago)
 
Location: Jollyville
2,700 posts, read 5,423,398 times
Reputation: 2016
Default Why the big difference in trade in vs. retail or private party value?

I'm looking at buying a new vehicle. According to Kelly Blue Book, which I understand to be the car dealer's reference of choice, my 2001 Rav4 is worth $5375 trade-in, $7370 Private Party and $10,405 retail. Thats' a HUGE difference. I can certainly understand why you'd pay more to buy this vehicle retail from a dealership and that the dealership (or car shop) might put $1000 or so into sprucing it up, but there's a $5000 difference between the two. And half the time, dealers won't even offer you full trade-in value, they start with a ridiculously low offer and you're lucky to haggle "up" to the book value.

What's the logic here?
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Old 10-16-2008, 08:59 AM
 
Location: Oswego, IL
5,609 posts, read 6,476,176 times
Reputation: 34581
Quote:
Originally Posted by Moonlady View Post
I'm looking at buying a new vehicle. According to Kelly Blue Book, which I understand to be the car dealer's reference of choice, my 2001 Rav4 is worth $5375 trade-in, $7370 Private Party and $10,405 retail. Thats' a HUGE difference. I can certainly understand why you'd pay more to buy this vehicle retail from a dealership and that the dealership (or car shop) might put $1000 or so into sprucing it up, but there's a $5000 difference between the two. And half the time, dealers won't even offer you full trade-in value, they start with a ridiculously low offer and you're lucky to haggle "up" to the book value.


What's the logic here?


Many retail businesses operate on a 50% gross profit. That means 50% of the selling price is profit. There is not a Kelly blue book for furniture, appliances, jewelery etc most of those retailers mark things up about the same percentage. Another thing that makes auto markups higher is the fact that very few people expect to pay retail for a car. Next time you're looking at a refrigerator look at the MSRP. That would be about the same as looking at dealer retail on a car.
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Old 10-16-2008, 09:11 AM
 
Location: Montrose, CA
3,031 posts, read 5,475,624 times
Reputation: 1833
Quote:
Originally Posted by Moonlady View Post

What's the logic here?
The dealer has to clean it up and possibly repair it. They have to hold it in inventory until it sells (which could be a while), and they have to give some sort of guarantee on it when it does get sold. It's all about business and making a profit, not difficult to understand at all.
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Old 10-16-2008, 11:36 AM
 
Location: south central Pa
140 posts, read 494,369 times
Reputation: 115
As Studedude and Susu have said a dealership is like any other business. Making a profit after expenses is the goal. There is alot of overhead in a dealership, new car dealers especially.
I have worked in the auto dealership parts field for 26 yrs and there are more expenses then ever. Some (alot) from the manufacture and alot from employee benefits and general overhead.
To give an example the manufacture charges the dealer to use the manufactures website and automated phone system . We are now charged for customer parts orders by percentage. Electronic parts catalog monthly usage and monthly updates. Special tools that the manufacture says we need (we have tools in the tool room that have never been unpacked). Yearly training updates and refreshers.Advertising newspaper and tv/radio, coupons. Not to mention all the regular expenses that come with most businesses, lights, gas, water, insurance, computer, taxes etc. In the sales end there is even more expences from the manufacture and others.
And to add one that just came out today. The manufacture has redesigned keys again to the side milled keys that will require a $7000 key machine + yearly updates to cut these keys . This will go along side the $5000 machine we already had to get a few yrs ago to cut the keys that were redesigned then.
Alot of the expenses are mandated by the manufacture and are not in the dealers control.
This is not ment to be a whine but to give an idea of what a dealer has to spend to stay in business.
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Old 10-16-2008, 02:34 PM
 
8,074 posts, read 20,911,967 times
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What makes the numbers in KBB or NADA published listings is how the deals are reported, which obsfuscates the "real" dollars involved.

Obviously, a dealer wants your "trade-in" value to be as low as possible to prepare you for the financial loss you may be about to take in value for your car.

So, they play "games" with the deals, and what you're not seeing is the other half of the deal as structured with a trade. What counts to you, as a consumer, is the "cash difference" that you will pay to trade out of your current car into another.

For example, a dealer may sell you a $10,000 listed car for $7,500 ... and show your trade in which is worth $5,000 as being traded in for $2,500. The deal was predicated on you making up the difference of $5,000 in other funds, but the reported trade-in price for your car was only $2,500 to the data publishers. That's a huge difference compared to reporting your new purchase at $10,000 with a $5,000 trade-in.

Depending upon secondary market activity and demand, the dealers will play games with these values. If a car is in short supply as a trade-in, they'll report the higher valuation trade-in deal to attract sellers. If there's a drop-off in activity for a given car due to low trade in values, the dealers will also try to pump up the trade-in values, especially the new car dealers for that marque. If there's a "soft" market on the re-sales of a car, the dealers will report the lower price values for those cars.

Either way, you ... as a consumer ... don't have very good information to work from. The best valuation as an indicator of what your car might be truly "worth" is the bank loan value, and the next best number is the "private party" sakes numbers. Another good indicator is to visit with your insurance agent. If you try to insure a car for far more than they see it's "worth" in the marketplace, it may ring some bells with your agent.
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Old 10-16-2008, 03:04 PM
 
Location: WA
4,006 posts, read 12,755,889 times
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There is a lot of overhead in running a car lot and the only way to cover it is to buy low and sell high. It is not a public service but a for profit enterprise.
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Old 10-16-2008, 03:09 PM
 
Location: Purgatory (A.K.A. Dallas, Texas)
5,012 posts, read 7,656,513 times
Reputation: 2262
Trade-in is lower because they have to sell the car around retail.

Figure anywhere from $500 to $1000 cleaning up the car and getting it readay for the lot, then it may sit for a while. When someone does buy it, they rearely pay the asking price.

If a dealership can have their used car department averaging $1800 profit a car, they are doing exceptionally well.

Also, keep in mind no dealership uses KBB. The use Black Book and Mannheim Auto Auction, which is a far better indicator of the actual market. KBB tends to be higher because if they give a higher value, then they get more hits on the site, which then increases their profit.

From KBB, cars tend to be worth about "fair" to "good" for trade-in.
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Old 10-16-2008, 03:12 PM
 
Location: Eastern Washington
8,765 posts, read 21,689,520 times
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Moral of the story is, if you have the time and are willing to do the work, you can save some money by selling your old car yourself.

You didn't ask, but, given the economy as it is, why not just keep your Rav 4?

Only real advantage to trading in, besides convenience, is to dodge paying tax on the entire price of the new car (in most states) you are only taxed on the difference in the new price and your trade-in value. Texas being Texas, they may indeed do it differently. (not that that's a bad thing!)
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Old 10-16-2008, 03:36 PM
 
Location: Northern California
3,471 posts, read 8,788,572 times
Reputation: 1460
Dealers are now loaded with SUV's and trucks that they can't get rid of and that's why they won't give much money for them. Everyone wants a small car with better gas mileage.
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Old 10-16-2008, 03:57 PM
Status: "Back to the grind" (set 20 hours ago)
 
Location: Jollyville
2,700 posts, read 5,423,398 times
Reputation: 2016
Quote:
Originally Posted by M3 Mitch View Post
Moral of the story is, if you have the time and are willing to do the work, you can save some money by selling your old car yourself.

You didn't ask, but, given the economy as it is, why not just keep your Rav 4?

Only real advantage to trading in, besides convenience, is to dodge paying tax on the entire price of the new car (in most states) you are only taxed on the difference in the new price and your trade-in value. Texas being Texas, they may indeed do it differently. (not that that's a bad thing!)
Well, thanks everyone for the answers. I totally understand and expect that the dealers need to make a profit. Trust me, I have P&L responsibility in my job and I know what's involved in operating expense, overhead and margins. I have zero respect for car dealers unfortunately because many of them resort to underhanded tactics and I'm a shoot straight and play fair kind of person.

M3 Mitch -I have actually sold all my previous cars outright myself. We take really good care of our vehicles and have always gotten between the Private Party and Retail amounts. However, I did consider the tax aspect of the trade-in, but the difference between a $5000 trade in and even $8000 in a private party trade will more than pay for the tax difference.

getmeoutofhere - thanks for the info. I thought KBB was what they used. Years ago (I'm dating myself here) they used to pull out the old NADA book. What's odd is that NADA and Edmunds values are always much higher than KBB. I thought that's why they used them!
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