Car Buying 101: What to do with a Trade-In

Note: See my post from April 20 "Is Now a Good Time to Buy a Car" for the 1st 2 Rules of car buying. http://just-walt.blogspot.com/2009/04/is-now-good-time-to-buy-car.html Rule #1 Start your shopping at home and Rule #2 Shop for your money before you go to a dealership. This post starts with Rule #3.

In car sales, over 80% of transactions involve a trade. Chances are that you’re already driving a car when you want to buy a different one and you’re thinking of “trading it in”.

As a profitability and sales training consultant in the auto industry I have encountered various ways this is handled at hundreds of dealerships. And, in a lot of them it’s not handled very well. The vast majority of customers don’t know how to handle it either.

Rule Number 3: Be realistic about your trade
A few simple steps will help you as you’re getting ready to buy a new vehicle and trade your old vehicle.

Step 1— know the pay-off amount if you still owe a loan balance on your trade-in. This is easy to do either online or by phone. Most loans now have a website where you can access the pay-off amount. You can usually find it by looking at your loan documents. And most lenders have a phone number where you can find out the pay-off. It’s usually automated and all you typically need is either your loan number or your social security number or both.

Know the pay-off amount! It will be critical in finding out whether or not you owe more than the vehicle is worth. And the pay-off is NOT the same as the sum of the remaining payments.

Step 2—get an idea of how much your trade is worth. This is easy enough to do as well and you need to go back to Rule #3—be realistic about your trade. The simplest way is to go online to KBB.com (that’s Kelly Blue Book). This site will open and 2 boxes will be on you screen, one for new cars and one for used cars. Click “go” in the used car box and it will walk you through the process. You’re going to ask for Trade value not for “sell it yourself” or “retail”.

You want to get an idea of what you might expect a dealer to offer you for the vehicle and this will get you reasonably close. If you look up “sell it yourself” or “retail” the difference between the results you get and what a dealer tells you will send you through the roof. Now, whatever the trade-value shows on KBB.com, subtract about $1000 from that amount. This should get you reasonably close to what a dealer will offer you. Why the discrepancy? Here’s why:

“Trade-in Value is what consumers can expect to receive from a dealer for a trade-in vehicle assuming an accurate appraisal of condition. This value will likely be less than the Private Party Value because the reselling dealer incurs the cost of safety inspections, reconditioning and other costs of doing business.”

That’s right off the KBB.com website. Look at the bold phrase. That’s why you will be offered less than what the KBB amount shows. I can’t think of anyone who has ever had their vehicle inspected and reconditioned prior to taking it to a dealer for trade-in. It’s things like 4 matching tires each with a minimum of 40% of their tread or 50% of brake pad remaining. That’s just for starters.

Yes, if the dealership keeps your trade and re-sells it at retail, they will be marking it up several thousand dollars. They may have to spend $1000 or so for it to be ready for retail. But that’s how dealerships make money.

Plus, the dealership has to pay for its facility, advertising, etc. This is part of being realistic about the value of your trade. If the number you come up with is unsatisfactory to you, be prepared to sell your vehicle on your own—and you can put however much or little money into reconditioning and merchandising it as you want. But if you do that, be patient and it’ll be up to you whether you want to wait to buy your new car until after you’ve sold your “trade” or not.

So, if you’re going to proceed with trying to trade your vehicle, have these 2 key pieces of information (pay-off and estimated value) with you. Hold these 2 cards close to your vest because they’ll come in handy later in the process.

We’ll jump ahead just a bit in the process here. Let’s assume that you’ve selected a vehicle to buy and that now you’re going to go inside the dealership with the sales person. You’ve established that you’re interested in trading.

Let me put it slightly differently. In sales training, I would suggest to sales staff that they introduce the “trade” with this “wordtrack”: “Sir/ma’am were you going to continue to drive your current vehicle or were you thinking of selling it to us?” Think about those words. When you’re trading a vehicle you ARE SELLING it to the dealer. They’re not “trading” with you; they’re buying it from you.

One of the things I have trained sales staff to do is to do a silent walkaround of your trade-in, with you present. It’s a technique to “de-value” your vehicle and to get you more realistic about its value. If you’ve done your homework (pay-off and estimated value) you’ll already be realistic. At that point they will need to see your vehicle registration which is also a good time for you to provide your insurance slip as well.

Step 3—Expect disclosure. Once you’re inside with the sales person, at some point he or she will take a bunch of papers to “the desk” or to the manager. Ideally the manager will get up and go outside and “put his hands on” the car, even drive it. Then he will come back in to do some “mumbo jumbo” which will yield a “trade value” or “allowance”. The “mumbo jumbo” involves going to KBB.com or another source to “book” the vehicle. Sometimes if you’re trading another manufacturer’s car it will involve a phone call to a used vehicle manager at a dealership that sells that make to get a value.

Then the manager will come up with a “book” value from which he/she will subtract reconditioning and other costs which should then yield what is known as ACV or “actual cash value”. Quite frankly, this is the true trade value of your vehicle. A scrupulous dealer will show you how they arrived at that figure.

What the dealer of course wants to do is to provide you with one figure (usually a monthly payment amount) for a proposal to buy the car. Often they will also include the “trade allowance”. If that isn’t provided, send the sales person back to the “desk” to get it. If it’s at great variance with what you came up with, ask for the “form” or documentation on HOW they arrived at that figure. You can also request an MMR or Manheim Market Report.

This is a document available to subscribing dealers which shows how much automobile wholesalers have recently actually paid for vehicles similar to yours in your market area. It is arguably the most accurate source for the value of a trade in vehicle because it shows the “real” money that wholesale buyers have paid for vehicles that they intend to recondition and retail.

Quite frankly, if a dealership is unwilling to share with you HOW they arrived at the ACV/trade valuation or to provide an MMR what you might wish to do is leave. There are hundreds of dealerships out there with thousands of vehicles for you to buy. Expect and require disclosure. And, odds are that the dealership will disclose the information once you are insistent that the whole “deal” depends on it.

This doesn’t happen very often anymore, but when the trade appraisal is provided to you, make sure that your keys are returned. Yeah, some dealers still play the game of “hi-jacking” your keys so just make sure that you get them back now. This will also send the message that you are still not committed to “buying and driving today” which is fine. If that question comes up, your answer is simple: “If I buy this car and trade you mine, you’ll get the keys. But let’s concentrate on this other stuff first.” And then just leave your keys sitting conspicuously on the table or desk top.

You want to be satisfied with your trade value, and you also want to be satisfied that if you owe more than what it’s worth that the difference will be accommodated in whatever final deal is negotiated. We’ll talk about that in a future post.

And lastly for today, a little information can be a dangerous thing. It’s as counterproductive for you to take this information to a dealership and act like a know-it-all butthead as it is for dealership personnel to act the part of fast talking, bs’ing, conniving jerks. However, one of my consistent messages to dealer sales personnel has always been that their success depends on the “Golden Rule”: “Them with the gold, make the rules.” The customer has the gold and dealership staff are trying to earn the privilege of getting you—the customer—to part with some of it.

A Little Car Talk

Pretty much everyone who knows me knows that I spent the last dozen years working in the car industry—selling them, training people how to sell them, consulting with dealers on how to be more efficient and profitable. So, I thought I’d spew forth some thoughts on the industry, its ailments and what would help.

We know that GM and Chrysler are on the brink. Ford is shaky. Toyota lost money last year. If Honda made money, it wasn’t much. VW is now making noises that it wants to grow to become the top auto manufacturer in the world. Lots of turmoil and changes.

Even when things were going pretty well, people had quit buying vehicles from American manufacturers. The reason was pretty simple, for too long the Detroit 3 didn’t make very good vehicles, put its priority on SUVs even when gas got to $4 a gallon and in general didn’t do a very good job. Then the economy went down the toilet and people just quit buying. It crippled an already wounded Detroit 3 and hamstrung the major Asian manufacturers. But that’s only part of the problem.

Bailouts from the taxpayer may keep the manufacturers afloat—or not. But that doesn’t have a whole lot to do with the process of actually buying and selling vehicles. That’s done at the franchise or dealership level. And at the dealership level is where the car industry gets it deserved bad name. Let’s be crystal clear, there are a lot of dealers out there that are ethical (the last place where I sold cars epitomizes how to do it with integrity). But, there are also a lot of dealers, irrespective of their nameplate, who seem to revel in perpetuating the image of the double dealing, lying, screw the customer car dealership.

Here’s the bottom line—if there’s something going on in a sales negotiation with a customer that you won’t, can’t or don’t disclose then you damn well shouldn’t do it. Things such as “stealing trades”—which is intentionally undervaluing a vehicle trade appraisal to boost profit. Things like claiming that a customer’s credit isn’t as good as it really is in order to boost the interest rate of a naïve or unsuspecting customer. Things like high-balling a proposal (“pencil” in the jargon of car sales) in order to “launch” the customer and then get them “under control” and more reasonable during the remainder of the negotiation.

Things like failing to disclose “back-end” (warranty, GAP insurance, etc.) during the negotiation and close, which isn’t supposed to be done, but still routinely happens. And after underallowing on a trade, financing a customer for 84 months (7 years) knowing that the customer will want to replace the vehicle in less than 4 years and will have thousands and thousands of negative equity (talk about shooting yourself in the foot).

These are just some of the things which alienate customers. There is an even longer litany which can be listed. However, these types of behaviors put the retail side of the industry in a bad light and even worse, are indicative of a mind-set which is concerned only with “today’s sale” rather than on building loyalty and repeat business. I know of a dealer in the L.A. area who brags about the $2 million sign he has soaring over the dealership paid for by the profits from the over-priced after-market service contracts he sells with proceeds going into off-shore accounts. His profit margin is so high because he revels in making it exceedingly difficult for customers to get pay-outs on the service-contracts for repairs.

And, there are still far too many sales managers and sales staff who think it is perfectly all right to lie to customers. All this combines to imperil the auto industry in a totally different way than the poor decisions and management of some manufacturers. No brand of car is immune from dealers who operate in this fashion. It’s not confined to the Detroit 3. You’ll find Lexus and Honda and Mercedes and Kia dealers who do the same kinds of things. By the same token you’ll find Infiniti and Toyota and BMW and Suzuki dealers who are totally ethical.

Caveat emptor has long been the watchword of the retail side of the auto industry. Until this changes, the industry will continue to be in peril—at the expense of the consumer.