At Lefkoff Law, we represent car companies – dealers, manufacturers, finance providers, auctions, repo, repair, storage… you name it! If you’re a car business owner, we work with you. The Lifecycle of a Used Car is the next installment in our series on The Lifecycle of a Car.
In our previous blog, we discussed The Lifecycle of a New car from product inception to being purchased by the end user. Now we’re going to explain the process for used cars.
How does a used car get to the Dealer’s lot?
New car dealerships have a used car section that is not all trade-ins. Independent dealers, which are dealerships that sell different car brands and do not have a franchise tag to them, also have cars for sale that were not obtained as a trade-in. In fact, over 80 percent of the used cars you see on the lots are not trade-in vehicles, these used cars are bought at auctions.
A consumer buys or leases a new car, drives it for a certain amount of time, and then decide they want a new or different car. They trade in the car and it’s on the dealer’s lot. The dealer will decide if they want to keep it on their lot for 30 to 60 days. If it does not sell in that time period, the dealer sends it off to auction.
What types of auctions are there?
There are hundreds of auto auctions around the country and internationally.
Standard used car auctions are for ‘members-only’, like Manheim, for example, which is one of the big players.
Throughout the country, there are also public auctions and then you have totaled car auctions.
In standard auctions, the dealer will send the car to auction after it doesn’t sell on the dealer’s lot. Some dealers won’t even put it on the lot. They will take in the customer’s trade and they will immediately sell it off at auction. The buyers are all over the country – they can be big dealers, small dealers, rural dealers, urban dealers, suburban dealers, etc. They all have access to these auctions and that’s where they buy the used cars. Some dealers will go to the auction to see the car in person and to make sure it’s working properly. Other dealers do this all online.
Rating the condition of the vehicle
Auctions have different ways of presenting vehicles to dealers: they mark them with different lighting. There are green light, yellow light, & red light designations. They have different disclosures to point out certain issues & they have different processes by which they go through to evaluate the condition of the car. They’ll make detailed condition reports and then they’ll offer guarantees. The dealer gets the car from auction, it is then transported to the dealer. If the vehicle is not what they thought it was, then the dealer has the right to send it back. This is called the auction arbitration process.
On the lot vs. other options
When dealers take a car in trade they have to decide if they are going to put it on their lot or not. How do they make that decision? Usually, it’s based on the market. Some dealers are just not going to sell an $8,000, 15-year-old car with 150,000 miles on it and other dealers aren’t going to sell a two-year-old car with 10,000 miles on it that’s worth $50,000. It’s just not their market so they will send those cars off to auction.
The other choice they may make is to consign the vehicle. In a consignment arrangement, the dealer finds another seller who might have better access to that type of market. They make an arrangement where they sell the used car to the dealer for a specified percentage or dollar amount. We do these heavily paperworked arrangements quite often at Lefkoff Law.
That’s generally how the car gets from the point where the consumer trades it with the dealer to the point where it goes to another dealer. If by auction, then the other dealer buys the car and then they have to arrange for transportation. In our previous blog, The Lifecycle of New Car, we discussed how new cars are transported and how used cars need to be transported as well. The cars get picked up from the auction and when they get to the buyer’s lot, they are cleaned up to get ready for sale. Many issues can arise in new car transport and they are compounded in used car transport. Sometimes cars never arrive at the lot and sometimes they come in damaged.
What happens when the used car gets to the lot?
Dealers have a particular set of considerations that are different than franchise dealers such as:
- How do you advertise that car? Cars.com, AutoTrader, Car Gurus, or online sources?
- What kind of warranties do you provide?
- What kind of warranties do you sell?
- Is the vehicle still subject to the manufacturer’s warranty?
- What representations do the dealers make about the car?
All of these things have to be taken into consideration and in each one of these steps, there is a recipe for failure.
Economics of a used car
The vast majority of used car dealers do not have enough cash to just go buy the car straight up at auction. They’re not usually buying one car at auction they’re buying multiple vehicles to put on the lot. Dealers can arrange for what is called floor plan financing.
The dealer goes to a finance company to get a line of credit that will allow them to buy cars at the auction. This works differently than your standard line of credit because it is secured by the vehicles. In our previous lifecycle of a new car blog, we reviewed financing arrangements and security interest. The company used to finance the vehicle gains a security interest in that car so that that company can repossess the car in the event the customer doesn’t pay.
It’s a similar situation with floor plan financing. The floor plan company gets a security interest but not just in a specific car, they get a security interest in all of the dealer’s assets in the event that the dealer defaults on their floor plan arrangement. Another difference in floor plan financing is that they have fees we call curtailments that arise when a car is not sold in a certain amount of time.
What are curtailments?
The way these agreements work is that the dealer will buy a car at the auction, transport the car to their lot, and put it up for sale. They are paying interest on the financing and after a specified period, if the car is still unsold on the lot, the floor plan company can add a curtailment to the balance owed. A curtailment is simply another fee for failing to sell the car. The longer the car stays on the lot, the more it’s costing the dealer and they have more incentive to sell.
The last thing a dealer wants is for a floor plan company to start calling their floor because it is very hard to negotiate a resolution when the dealer has a floor plan company in default. Worse yet, is when dealers take out a second floor, and instead of using the floor to buy cars which they are under the contract for, they use that floor to pay off the other floor. Now you have compounding interest and it’s really hard to get out from under that situation.
The next step in the process
Now the dealer has used the floor, and bought the cars at auction… how is the title transferred?
Most consumers don’t know this, but the title stays generally with the floor until the floor is paid off. The floor does not release the title until the dealer pays them off. Then, the financing company will transfer the title to the dealer who in turn, transfers the title to the consumer. That’s how most used car dealers can afford to put their inventory on the lot.
What happens when a used car is at the end of life?
The consumer has bought the used car and they are the second owner, the third owner, the fourth owner, etc. At some point, the car is out of service and at the end of the lifecycle of a car. The car can be brought to CarMax, Carvana, or a local dealer for an estimate. Typically the dollar amount offered is low. When the customer accepts the offer two things can happen:
The used car is sold overseas
The car can be shipped overseas where it is getting sold once again at auction to an overseas buyer. Oftentimes, the vehicle is shipped to a country where the regulations are not nearly as strict as they are here in the United States. The buyer over in that country can take the car and prep it for sale. It doesn’t work that way in the United States because we have emissions testing, different consumer laws, and various things that the dealer has to do to actually sell the car. Some foreign countries don’t have those rules – if the vehicle works, they can sell it. In the event the car is not sold to an overseas buyer, it gets scrapped.
The used car is scrapped
There are two ways a car can be scrapped:
- The parts can be melted, recycled, and remanufactured into new things. There are valuable raw materials.
- The car can be disassembled and used for parts. Some companies do this and have physical locations. For example, if a consumer has a 2010 Acura MDX and needs a rearview mirror that is no longer in production, they would go to one of these shops to buy a rearview mirror for a 2010 Acura MDX that is no longer running.
So there you have it. The Lifecycle of a Used Car from start to finish. We hope you enjoyed this blog series on The Life Cycle of a Car and we appreciate your interest!
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