KBB? Black Book? MMR? NADA?- What’s a Fair Representation of Your Trade?
When purchasing a newer vehicle, a lot of consumers are faced with a simple question; what am I going to do with my current vehicle? A lot of people come to the decision to trade in their vehicle on the newer one; many come to this conclusion based on the sheer convenience, the tax implications, etc. The next question consumers encounter is ‘how much is my trade worth’ or ‘how will the dealership value my trade’? My goal is to shed light and understanding on how a trade-in value is determined, or should be determined.
Before we can understand how a trade-in value is determined, we need to start on common grounds. The Automobile sales industry has grown tremendously in the last 20 years and has taken HUGE steps forward with the increasing support of the internet-era shopper. Twenty years ago if a consumer wanted to compare prices at different dealerships they would drive from dealer to dealer to find a vehicle, then to compare prices. Fortunately, the internet has all but rid our industry of this inefficient shopping method. With just a few clicks of a mouse consumers are able to shop, compare, research and find vehicles throughout the entire country.
The internet has created a ‘perfect market’ in the automobile industry. Perfect market is defined as a market in which buyers and sellers are so numerous and well informed that monopoly is absent and market prices cannot be manipulated. Consumers are able to access the same information as sellers, and more often than not know the ins and outs of the transaction before even arriving at the dealership the first time.
When a dealership takes a vehicle in on trade, their sole intention is to turn around and sell it at a profit or worse case, at breakeven. With that in mind, how do they put a number on the vehicle? Among the most common are KBB, Black Book, MMR (auction pricing) and NADA. For an example I used a 2015 Ford F-350. All of the examples below were created using the exact truck, miles, and equipment.
As far as KBB is concerned, the example vehicle is worth $40,176 to a dealer. Now, what the consumer sees is that the trade-in value is $40,176 and the retail price is $48,487 and they decide that the dealer is going to make $8,300 on the transaction; that’s not the case.
Now, when we look at Black Book, we see a little thinner “profit margin”, but still, $4,400 is a lot to make on a single transaction.
Next, we are going to take a peek at the MMR, or auction suggested price of the vehicle. Now, MMR is not going to be as specific as the two previous guides as it does not drill down into the equipment, it just pulls the year, make, model, odometer and your location. But still, a $5,100 “profit” would make every one excited, and a salesman’s day.
Finally, NADA has been looked at for years. I know dealers who still subscribe to the monthly printed booklets. The spread is also around $5,000.
With all of these trade values ranging from a little over $40,000 all the way up to almost $45,000, how is anyone supposed to come up with a true value for the vehicle? Well, now there’s a new way of thinking and it is reshaping the automobile industry.
Think of it this way. Up until this point, dealers have given what they think a vehicle is worth, then marking it up a few grand to resell. Some of these vehicles will sell quickly, others hang around for a while. Dealers have finally gotten a little smarter, and with the help of a very efficient program, made determining a vehicle’s value much more fair and systematic.
If a dealership takes in a trade-in vehicle with the sole intention of selling a vehicle at a profit or breakeven (worst case scenario), shouldn’t they have an idea of what the vehicle will sell for and let that dictate what they give for the trade?
Dealerships that have progressed to this line of thought have seen volume increase, gross per vehicle sold decrease slightly, but overall profits soar.
Using this example, I will show you how a value is determined.
First off, the appraising employee determines whether this is a vehicle we intend to retail or wholesale (retail sell to consumers, wholesale sell at auctions or to another dealer). Once that is determined the appraiser uses their experience to determine the amount of money it will take to make this vehicle front line ready (ready to sell), in this case it needs $800 of work, maintenance and cleanup. The next step is to determine the return on investment that they are aiming for. Typically, higher profit will be sought out on larger investments than on smaller investments, in this case I chose $2,500 (just a hint over a 5% profit margin).
After those two values are inputted, the program does the rest. The appraiser is able to adjust the market distance based on the amount of like vehicles in the market; if there is only 1 within 250 miles, the appraiser will widen the market in order to get a true depiction. In this case, the ‘price rank’ represents if we were to give $42,000 for the vehicle, then spend $800 on it in recon, and then expect a $2,500 profit, that we would be priced the 3rd lowest priced out of the 9 vehicles in the market at $45,300. The vRank represents that this truck would be the 5th highest priced in respect to price and odometer reading out of the 9 vehicles in the market.
In times past, the most important number to a dealership was what they thought it was worth trade-in wise; now, the most important number is the value I can advertise it at and stay competitive in the market. Say the consumer wanted $43,000 for their truck:
1. Old way of thinking: Trade for it at $43,000, spend $800 to recon it, and sell it for $46,300.
2. New way of thinking: Trade for it at $43,000, spend $800 to recon it, and sell it for $45,300.
Yes, the new way of thinking will yield $1,000 less profit, however it’s not efficient to spend marketing dollars on a vehicle when you have it priced too high for the market. The trick of the trade is not to take “big wacks” at making profit, but to take a lot of smaller, consistent wacks and have them happen much more frequently. This has benefited the consumer and dealer. Consumers are able to purchase vehicles that are more competitively priced, and dealers are able to turn their inventory faster, resulting in more bottom line profit. There’s always a downside to everything, however in this case, it’s more of a perceived downside. The days of being able to negotiate $4-5,000 off on a pre-owned vehicle are over. Any dealer that still uses the old approach and have their vehicles marked up enough to have the ability to negotiate over that much money, will not be a successful business practice in years to come.
In summary, research research research. If you can go into a dealership with a list of vehicles for sale in the area that are very comparable to the vehicle you’re trading in, it will make the process easier for both of you. When the appraiser explains that your trade needs tires, a new battery, etc…ask them how much they intend to spend on the vehicle in order to make it ready to sell to the next consumer. At that point, it’s fair to ask what they expect their return on investment with your vehicle to be. You can slowly back into what the trade offer should be on the numbers they gave you, and then compare that value to what they showed you on paper.
