To Private-Sale or Trade-In (That is the Question)

As the old adage goes, ‘nothing good every comes easy’.

One could arguable that this sentiment is applicable to most things in life; then again, we’re not here to talk about most things. We’re here to talk about trade in value, when purchasing a new vehicle. And in that regard, you can trust that the adage holds true.

Buyer Beware

At McCluskey Automotive, we prefer to empower our customers with information and insight that ensures a satisfying buying experience. Other dealerships may prefer to short-change their customers in areas like trade in valuation, but that’s not how you build strong relationships with your valued customers.

And that is where ‘ease’ (or lack thereof) comes into play. Financial advisors often recommend that vehicle owners facilitate sale of a vehicle in private, prior to engaging with a dealership. The motivation for this comes from the fact that a dealership has to acquire that vehicle for less that they can resell it for. Despite the expectation of getting less for their trade in, the majority of customers still choose to facilitate this through a dealership. Why?

Simply because it’s easier.

To facilitate a private sale requires time, patience and exposes the seller (as well as their family and residence) to constant interruptions from potential buyers, and all of the built-in hassles that can accompany it. Considering that many people decide to purchase a vehicle with minimal warning, or advance notice, there simply isn’t the time to facilitate a private sale. This is especially true since the majority of car buyers require a trade-in to partially offset the cost of the vehicle purchase. And because the dealership makes the process easy, most customers are willing to accept any difference in valuation. But what is a valuation based on?

Actual Cash Value (ACV)

Originating in the insurance industry, ACV (also known as ‘FMV’ or Fair Market Value) represents the amount that a buyer would be willing to pay for the vehicle, in the condition that it stands, at the time of sale.

This value could be influenced by a number of factors, including (but not limited to):

• Age of the vehicle
• Current demand based on seasonality
• Current Market Value
• Wear & Tear
• Mileage
• Accident History
• Need (if any) for Reconditioning

That said, it is a misconception that every automaker, dealership and lender calculate valuations the same way. There is no set standard, and (while helpful) tools such is Kelley Blue Book and Black Book can provide insight as to a vehicle’s value, it can not be taken as gospel.

That said, if you are able to confirm an idea of your vehicle’s ACV, you can use that as a benchmark to set realistic expectations. This will help you regardless of whether you choose private sale, or a dealer trade-in.

Depreciation (& Upside Down)

But in determining the ACV of a vehicle, be prepared. If you are still making payments on your vehicle, your balance could exceed the amount of the valuation. This means that you are upside-down in your loan, and that sale of the vehicle couldn’t be finalized until you paid any difference. Keep in mind this is highly likely on any vehicle, bought new, for which payments are still being made.

The dreaded ‘depreciation’ is the root of many headaches in both car-buying, ownership and resale. Simply put, depreciation describes the continual loss of a vehicle’s value over time.

Have you every heard the saying that a vehicle loses value the moment it leaves the dealer’s lot? It’s true. In fact, before the rear tires even hit the street, that vehicle has lost approximately 11% of its value. Supposing you had bought that new vehicle for $33,000 you could turn around, drive right back on to the dealer lot to sell it back, and it would only be worth around $27,000.

This instant depreciation begins the five-year stretch in which a vehicle loses the majority of its value. After a year of being driven, the car will have decreased in value by approximately 25%. After three years, that decrease in value expands to approximately 46%; and after five years it will be worth as much as 63% less than what you paid for it. Imagine that…after only five years, your $30,000 purchase might only be worth $11,100. And if you still owed $12,000 on your auto loan, you would owe the $900 difference.

If this were you, the unfortunate truth is that you wouldn’t be alone. In fact, car sales over the last year have shown that more than 1/3 of trade-in vehicles come from customers who are upside down on their loans. This may, or may not, apply to you but the relationship between value and debt are deserving of a better understanding.

Appraisal Tools

After all of this discussion, you might be inclined to think that a free appraisal tool (such as Kelley Blue Book, or Black Book) can make it easier for you to value your trade-in. While such resources can be helpful in getting an ‘idea’, it’s important to understand that dealerships do not use these tools. As a result, these types of appraisal may only have limited impact on your negotiations.

So, What’s Right For You?

The long and short of it, is that there is not black and white, nor is there a right way or a wrong way. If you opt to facilitate a private sale, you could get lucky and sell it almost right away. And if you opt to work with a dealership, rest assured that there are countless reputable dealers who will do right by you.

You just need to figure out what’s right for you. If applicable, understand if you’re upside down in your loan. Use the resources available to you to set your expectations as to the vehicle’s valuation. And visit McCluskey Automotive, where we take great pride in our commitment to helping our customers