Resources & Guides

How a dealer trade-in works

Trading up your old car is a significant pain point of buying a new car.  

The vast majority of people have two popular options:

One can sell their car privately or can trade it in to the dealership.

The problem lies with how dealers trade-in value is inextricably related to the costs of operating a bricks and mortar dealership…

The surefire way of selling a used car is to trade it in – but this without fail equates to less cash in your pockets.

While almost all of us get ripped off at the point of trade-in, but not for some.  This article explains how dealerships value trade-ins and why they do so in this manner.

Dealers buy cars at wholesale, including yours

Dealerships buy cars at wholesale and sell them at retail.  Fundamentally driven by the notion of buy low and sell high. There are no illusions to this gig.

So whether you realise it or not, when you trade-in your car to the dealer you are actually selling it at wholesale price for it would not make sense that a dealer would purchase your car for more than what they can acquire a similar car at a wholesale auction.

The wholesale prices change by following the same basic supply/demand reasons.  For example, when the 2011 Fukashima Daiichi nuclear disaster derailed Japanese car production, the wholesale prices for used Japanese cars went up.

There is a barrier to having direct insight into current wholesale pricing as it requires a real macro view of the market including a technical and fundamental understanding of price drivers and indicators.   Fortunately, with CARCHASE by your side, you can not only get a good idea of what a fair trade-in value is for your car but avoid the trade-in altogether – but we will get into that later.

Determining a fair price and valuation for your car 

The first thing you need to do is look around the internet and find out what your car is selling for at different dealerships.  No two used cars are exactly alike, but you can get a pretty good idea of what the retail value of your car is by being self aware of the real condition of your car and comparing it to ones that appear to be very similar.

Now that you have a good idea of what the retail sticker price is, you need to subtract out the wriggle room that dealers build into the sticker price.  Let’s say that the dealer is willing to knock off between 5-10% (subject to brand factors too) on a used car for someone who is willing to negotiate.  That means that the $30,000 car will actually sell for $27,000 in the best possible scenario.

Generally speaking, dealers expect to make around $1500 (plus/minus) when they sell a used car.  So subtract $1,500 from $27,000 and you get $25,500

But wait there is more…

Most dealers will perform a comprehensive inspection to see if your car has any issues, repair anything that needs fixing, and thoroughly clean and detail your car (including a new paint job if necessary) before putting it on the lot. This is a critical part of how dealers value trade-ins. Understanding how much a dealer is willing to spend is dependent on an assessment of your car’s condition. 

If you are certain that all your car needs is an inspection and a little detail work, maybe you should only subtract out $1,000.  But if your car is like most on the road and could use minor repairs, benefit from a little paint here and there, and maybe a new set of tires, you should plan on subtracting out more – sometimes up to $4,000.

Let’s say your car is in average condition and it takes the dealer $2,000 worth of work before s/he will put it on the lot.  The cash you can now expect drops down to $23,500

Dealers will often build in the cost of transportation (in case they want to resell it at wholesale to another dealer) and marketing.  New car transportation costs are around $700 and you can expect around the same cost for your used car.  The amount that dealers spend on marketing differs widely depending on where you are and what the dealer actually does to market their cars, but maybe $240 is reasonable ($120 x2 months average on popular directories).

That brings the cash amount you can expect for your car down to $22,560

Then the dealer bakes in the GST payable on the final listing price into the valuation so as to ensure competitiveness with other comparable listings, let us say the car will be listed for $30,000 and sells for $27,000 inclusive of GST – meaning that $3,000 – 2,700 is taken into account as the GST component.

The count is now at $19,860 taking into consideration the GST of $2,700

Dealers know that you need to get rid of your car and they love to negotiate, so you can expect their initial offer to be somewhere between 10%-20% lower than what they are actually willing to spend on your car.  If we split the difference and say that the dealer’s first offer will be 15% lower than they are actually willing to trade-in your car, you can expect an initial offer of around $16,881

Yikes!

$16,881?! What a terrible offer for a car that retails for $30,000!  And it is..

In the end it comes down to what is more important to you: time or money.  You could probably get a couple thousand more for your car if you sell it privately, but that takes time, energy, and resources.  If you don’t want to spend the time selling your car privately, you just need to expect that you will get a wholesale offer for your car. Or use CARCHASE.

We help you avoid this sub-optimal position by allowing you to take advantage of our operational and structural efficiencies and also similar (perhaps improved) levels of convenience when compared to dealer trade-in. Here’s how we determine the value of your car:

  1. First, we compare the market data of comparable cars just like yours that are actually for sale and at what price points they have sold
  2. Then we analyse how cars like yours fare at auction and wholesale
  3. We account for the subjective qualities and condition of your car by performing a 170-point inspection.
  4. There is no arbitrary pricing as we have a complete data driven approach

The operator of similar car in the example above (subject to being a private seller) would pocket $22,325

One cannot escape the mathematics of our value proposition.

And that’s how dealers value trade-ins. Sound stressful? Avoid this stress and have more money in your pocket by selling your car on carchase.com.au.