Appraising For Profit

Most of this is common sense to most good used car dealers; however, I’d rather explain something you don’t need to know rather than not explaining something you need to know. The #1 area that deflates profit in dealership operations is used cars. Dealers, or other personnel, don’t call the cars right, don’t stock the right inventory, don’t sell enough or don’t structure the vehicles correctly. So, in an attempt to share with you what works, here is a to-do list for your used car manager, buyer and front end management team:

Appraisal Process:

1) Who calls trades on the curb?

2) How do you figure reconditioning?

3) Do you have a set appraisal process to determine ACV?

4) Who can bump a trade ACV?

Calling Trades

Start with calling trades. 90 percent of the calls on trades should be by your, extremely skilled and trained, used vehicle manager. Exceptions to this would be when the manager is off duty, in which case the general manager or general sales manager should be appraising trades. Some stores, which I don’t necessarily disagree with, do not allow used vehicle managers to appraise trades on used car deals. One store that I’m familiar with had a very talented used car manager selling over 100 vehicles a month consistently. Great at selling cars and calling trades on new car deals. However, when it came to used car deals, he’d put whatever it took to make the used car deal. In that case, someone besides the fox should guard the hen house.

Reconditioning

Reconditioning is an area that people make huge mistakes on. When in doubt, over estimate what it takes to set up that vehicle. There have been plenty of times where I’ve called a car, figuring a transmission and it was a computer issue instead. There was a vehicle that looked like it got hit by 20 golf balls and I figured it for a complete repaint. Turns out, I got dent busters to fix it for half as much as I figured. Figure the worst and you’ll never go wrong. When we get into the heat of the deal, we tend to revert to the path of least resistance and “hope” for the best. This will kill you when you want to wholesale or retail that trade.

Too often, when a car hits 60 days and we need to move it, the used car manager starts talking about what a mistake that vehicle was. Well, you lost that money either calling it wrong the first time or over-reconditioning it. I have seen more than my share of 80-90-100,000 mile vehicles that should have been wholesaled that, instead, got reconditioned and put on the lot when they had no business being there.

A simple process on how to evaluate vehicles:

1) Run a CarFax or Autocheck report on every trade appraisal

2) Run Black Book, MMR (Manheim) or Adesa market value on your trade (preferably two or three out of three)

3) Run NADA or Kelley (depending on your market) on your trade

4) DRIVE EVERY VEHICLE (no window appraisals)

5) KNOW your market (Auto Trader, liners, etc.) & develop a network.

If you do not make exceptions to this policy, you won’t get burned on your trades.

#1 is extremely important. One of my former used car managers made a mistake and put ALL the money in a Nissan Sentra that turned out to have a salvage title, making that nice ride worth about half of what he called it for. Ouch! For what it costs you to make one mistake calling a car, you can afford to run vehicle history reports every time you look at a trade. Most of the time, you’ll catch prior accidents, odometer discrepancies and most other landmines in looking at a trade. Be prepared and call the car for the right money the first time.

It’s important to know what you can get for a vehicle, especially if it’s not your type of inventory. At one dealership I worked for, we had a difficult time with late model Hondas, Toyotas and VWs. Those manufacturers support their used vehicles with a strong certified program, finance or lease program or all of the above. That makes that vehicle worth less to our store on the curb. So, by utilizing MMR, Adesa or Black Book, you have an accurate indicator of what the market is worth on the trade.

By running two or three auction and wholesale values, you can get a true indicator of what the current wholesale market is. A good rule of thumb is to hit vehicles between rough and average wholesale money on average trades and between average and clean on low mile, loaded units.

Just as important is to run NADA or KBB on the vehicle to see what you can sell it for.

Be careful, as high mileage trades are worth less than what “book” calls it for (remember my reconditioning example). Another mistake is to call $1 cars for $500-1000. The same manager I mentioned earlier says “Anything that runs is worth $1000”. Wrong! If you don’t want to sit in it, nobody else will either. Don’t compromise your inventory just to make a car deal.

I can’t tell you how many times I’ve seen a manager so lazy they won’t get off their butt and DRIVE a trade. I had one manager (who didn’t last long) miscall a vehicle by $5000 because he didn’t drive a 2004 Trailblazer. He missed that it was a two wheel drive base versus the 4x4 loaded one, as the salesman represented to him. In addition, this vehicle had a bad transmission and, oops, the vehicle had 40,000 miles, making it out of factory warranty. Make sure you don’t put up with this and drive all your trades, even if it’s a vehicle someone lived in.

A smart car guy I met recently mentioned that he goes to the auction with an Auto Trader and the local liner ads instead of a book. I asked him why and his answer made great sense. He said that he brought it to gauge the spread between what a car can bring retail versus what it brings at the auction. If the spread makes sense, he buys it. If not, he’ll pass the unit rather than hope it works.

Develop a wholesale network. If a unit that doesn’t work for us is traded, we have a buying check writer on the other end of the phone who will give us all the money for that unit which doesn’t fit. If a late model Honda CR-V is being traded in on a Mazda6, which I had no interest in, based on our history, I initially hit for average money. After I called three used car managers from some Honda stores, I got extra clean money, making my gross on that “invoice” deal a $2500 front end deal.

Who can bump a trade?

Finally, as far as who can bump a trade, it’s pretty simple. Managers who bump trades to make deals need to look in the mirror. Weak managers bump trades without working the customer (silent walk around, showing them retail reconditioning costs, etc.) and need to reevaluate their career choice. I had a customer that swore his vehicle was worth $9000. I explained to that customer that his trade was worth $9000 minus the $800 in tires, $500 in brakes and $1000 in body and interior damage and got him to take $6700 for it.

Be strong in your resolve and you’ll get most customers to agree to your appraisal. To answer the question, once the used car manager puts a value on the trade, the only people that should ever bump a trade is the owner (if on site) or the general manager. If the system is any other way, you’re asking for trouble on the used car lot.

A proper used car appraisal process will help you make more gross and minimize your problems when vehicles need to go away.

Vol 2, Issue 6