Have you ever heard of a “Used Car Factory?” Probably not, because unlike many factory-made products, every used car is different – and can widely vary in value, even on the same model. And of course, buyers are more wary of potential issues on anything that isn’t brand new.
Today it seems like every dealer is trying to be their own used car factory, scanning local ads, buying from private sellers, paying more than ever at auction, and approaching their service customers with offers to buy. But keep your eye on the ball. Your highest value cars are still lease turn-ins and trades. These vehicles have proven to be the fastest-turning, most profitable units you can get your hands on. And dealers are finding that they’re even more valuable when they’re “homegrown.” Here’s why.
Perception Is Everything
Step into your customer’s shoes. They’re buying a used vehicle. And they’re likely thinking about reliability and future costs. Will this vehicle – that looks great today – turn into a money pit in a year or two? Perfectly reasonable logic.
But when you can offer them a vehicle that was originally sold (or leased) and taken care of by you, that lessens their concerns. When you can provide a detailed vehicle history showing service updates, oil changes, tire rotations and more, you win confidence and trust. Here’s a great video on how to use the vehicle history report during a sale. A vouched-for vehicle builds peace of mind. It’s true for trades; and even more true for lease turn-ins.
Customers all know that they can be dinged with surcharges for being over on lease mileage or for open maintenance or repair issues. Consequently, there is a strong public perception that most personal lease vehicles are meticulously maintained to avoid penalties. Most customers therefore view these vehicles as having lower long-term costs. This drives up demand — and prices. As a result, your trades and leases turn over faster (meaning lower carrying costs) and have higher profits than any other vehicle category. CARFAX Advantage dealers have the best tools available to further build buyer trust in the history and condition they’re paying for. Even if there was an accident, that history can help you buy and sell quickly to the right customer.
We call these vehicles, “Homegrown.” In a nutshell, here’s why these leases and trades are the best:
- Your expert technicians serviced and maintained them
- Customers perceive them as well-maintained
- You can accurately calendarize when leases will be turned in
- Most leases will qualify for highly desirable CPO designation
- Reconditioning costs on these cars are lower
- Collectively, this means faster turnover and higher profits
Growing a Used Car Factory
It’s been noted that the less you need to rely on outside sources, the more self-reliant you become, and the better off you are. And trades and leases? They’re the gold-plated, ongoing, “self-reliant” used car department supply line. What’s the best way to grow this part of your business?
Trades offer a two-for-one opportunity. If you have a trade-in, that means you sold a new car. Great. Now what to do with the trade? The wholesale/auction pipeline is always available. And with current wholesale prices up as much as 35%, it’s tempting to go that route. No muss. No fuss. Simple and easy.
But not so fast. If you want a thriving used car department, remember that trades and lease turn-ins are your supply line. It’s also important to look at your process for evaluating trades, as well as how you interact with those customers. For example, do you:
- Appraise every vehicle you can, including walk-ins just looking to sell?
- Offer appraisals to service customers on the chance some might consider selling?
- Appraise high-mileage units?
- Acquire and merchandise accident cars?
- Lose trades because you consistently under-allow on your appraisals?
It’s up to each dealer, but appraisals might be an area to reevaluate if your “look-to-book” ratio seems on the low side. Of course, having access to the most accurate, up-to-date, and most trusted vehicle data is extremely important.
Even more than trade-ins, leases are “homegrown” vehicles worth their weight in gold. You also have complete control of what you do with them. Sure, the customer can always opt to buy their lease and sell it themselves. Given current economics, some do this. But most don’t – especially after a gentle reminder that they’ll have to buy it – finance or cash, haggle with strangers, deal with payments, etc. It’s not a job that everyone is cut out for.
Many – if not most – personal lease returns can be certified as CPO.
- Virtually all personal lease turn-ins will only be two to three years old, with low mileage, some still in base warranty
- They will be well-maintained if for no other reason than fear of end-of-lease penalties
- They enjoy the added credibility of being serviced by your service department team
- And, by virtue of being CPO, they’ve been rigorously inspected and come with a factory warranty
As industry expert Bob Grill puts it, “When it comes to building value, what builds more value? Where the vehicle came from and who worked on it, or if it has power windows and power locks?” Many dealers use CARFAX Vehicle History Reports, which you can use to verify these solid vehicle histories and further boost your customer credibility. It’s no surprise that industry data indicates CPO units average about 25% higher profit margins than vehicles that aren’t CPO.
As Bob Grill says, “When you can’t find inventory anywhere today – why would you let inventory be dropped off at your door and not keep it?” Keep it and build your own “used car factory” that specializes in homegrown vehicles.
Learn more about how CARFAX can help you develop your own pipeline of homegrown vehicles.
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