Car Dealer Secrets: How To Be Confident You’re Getting A Fair Deal On Your Trade-In

Note from David: This is the first post from my friend, Tom. I hope he will be a regular contributor on a subject that is one of the biggest things many of us spend money on: our cars. Tom works in the car industry and has deep insight into how cars are bought and sold, and how you can save money (and have a better experience) in almost any car-buying situation.

Now, I know consumers and car dealers don’t have the fuzziest relationship, but I ask that you go easy on Tom, because he’s a good guy, and he’s putting his butt on the line to help our community. Obviously, he has a different perspective on things than anyone who has only shopped for cars, not sold them, but at the end of the day his goal isn’t to defend his industry’s reputation. It’s to help you understand why things work they way they do and use that information to your advantage.

One final note: As you’ll discover in this post, I have split personalities. Everywhere on the blog, I’m David. To my friends, I’m Dave. I answer to either. Without further ado, here’s Tom:

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So here’s my first blog post. Dave has been kind enough to invite me to write for Money Under 30. You might not know this about Dave, but he’s spent just enough time selling cars to be able to give some good advice, but also to be dangerous! I can hopefully give you a little more. Dave showed interest in my stories about car sales and customers and thought you would enjoy my anecdotes and advice.

Who am I? I’ve been selling cars since 1998 and I’ve spent time working with nearly every aspect of new and used car sales.  Currently, I’m a sales manager at a luxury brand car dealership near Portland, Maine.

One major hurdle you can encounter when buying a new or used car is the trade-in. It’s usually the toughest part of the deal to see eye-to-eye on. As a buyer, you have a personal connection to your car. Dealers see it as just another unit to manage. How do you know if you are getting fair value for your trade? Let’s see if I can shed some light on this part of the transaction.

1. Start – but don’t stop – with online research

If you want to know what you might be able to get for your trade-in, it’s easy to research. And although everyone should start here, it’s important to keep in mind that the number you find on the Web is not the end-all-be-all of trade-in pricing.

A simple Google search for “used car prices” will give you at least seven different sites on the first page alone that will give you a trade value. Unfortunately, you will probably get seven different values for your car. Which one is right? That personal connection you have with your car generally directs you to believe in the highest value you find, but it’s not always the most accurate.

Two things that are extremely important:

• The type of transaction
• Condition

You’ll see lots of terms used like clean trade-in, loan value, retail, private sale, etc. Let’s assume you plan to trade your car into a dealership and buy a new(er) model from that dealer. You are looking for trade value. I can tell you what to make of the other values at a later date. In my opinion, the most accurate site out there to determine trade value is Trade-In Marketplace by Autotrader.com and I’ll tell you why in a bit.

2. Be realistic about your car’s condition

I’d be a rich man if I had a dollar for every time I’ve heard a customer tell me their car has “new tires” and, upon further questioning, I discovered those “new tires” were put on 12,000 miles ago. In some cases, tires with 12,000 miles are half-worn!

Be realistic about the condition of your car.

Maintenance. Maintenance of a car is expected. Complete service history does add some value, but lack of service history devalues your trade far more significantly. For instance, that $500-dollar 60,000-mile service you just performed? It doesn’t add $500 dollars to the value of your car. However, if you didn’t do the 60,000-mile service and it is due, your car might be worth $500 less. Buyers expect that you maintained your vehicle to manufacturer’s guidelines.

Condition. Very, very few trade-ins are in excellent condition. Kelly Blue Books estimates that only three percent of trade-ins meet the criteria for excellent condition. Even good condition is usually a stretch.  But customers always rate their own cars either good or excellent.

So what is good condition? Take a walk on the used car lot:

• Shiny, recently waxed paint.
• No dents or major scratches.
• No interior odors.
• Carpets and seats are clean with no stains.
• No rips or tears in the cloth/leather.
• Tires are new or have significant tread life left (more than 50%).
• Service history is up to date and there are no mechanical issues.

Can you answer yes to all of the above? If not, then your car is probably in “fair” condition.

Payoff. I know you guys reading Money Under 30 are more financially savvy than the average car-buyer, but I’ll say this anyway: If you owe money on the car you’re trading, understand that the outstanding payoff balance has no correlation to the car’s trade-in value. In fact, many car owners with outstanding loans are underwater, meaning they owe more than the car is worth. That doesn’t mean we won’t still take your car in trade, but if the amount we offer is less than what you owe on the loan, you’ll have to either pay the difference or roll the difference into a new loan (not a habit you want to get into).

Getting perspective. My advice? Walk around your trade-in and pretend you are about to buy it for the first time. Ask yourself what flaws you see and what would you want the dealer to fix before they were to sell it to you. If you can realistically look at your trade-in this way, you’ll be better prepared at negotiation time.

3. Keep an open mind

Now that you’ve done your research, keep an open mind. If working out a trade-in figure was as easy as going to www.kbb.com, why would car dealers have used car managers to appraise trades? Contrary to what many consumers think, it’s not to low-ball your trade and make the process uncomfortable. The answer is that there are more variables to consider than any one website can address, and experience goes a long way. Car dealers trade multiple cars every single day. In my experience, the average consumer trades cars once or twice every five years.

What the dealers are trying to do.

The owner of the dealership entrusts the used car manager with an open checkbook and wants his/her money properly managed. A good used car manager is trying to offer a fair price for a trade-in given the myriad variables that will impact what the dealership can get for the car in a sale. He or she will take into consideration popularity (how fast a car will sell and is it in high or low demand), fuel economy (with gas at almost $4.00 dollars a gallon, people are less interested in fuel inefficient vehicles), and local supply (are similar cars available in fewer numbers or does every dealer in town have one in stock). These factors can have a significant effect on your final trade value, and they aren’t necessarily included in those Web numbers. For example, some dealers pay thousands of dollars each month for software that can accurately take all this information into account and help the used car manager appraise trade-ins for their correct value.

The final step in the trade’s lifecycle is what to do when it just won’t sell. That’s when wholesale auto auctions come into the picture. The reality is the dealer needs to know what cash amount they can convert your trade into if all else fails. Therefore wholesale figures must play a part in your trade value.

This brings me back to Trade-In Marketplace by Autotrader.com. What sets this trade value source apart from all the others is that they will cut you a check for the value of your trade. Cold, hard cash. If that doesn’t build validity in their trade figure over all the other sources then I don’t know what will. The Trade-In Marketplace figure generally leans towards the wholesale side of the price curve but, depending on what you have to trade, it might be spot on. If you have a squeaky clean, desirable trade-in, you can expect the dealer to do better than Trade-In Marketplace.

4. What’s the point?

Hopefully this post sheds some light on how trade-in prices are determined and what dealers are looking for. If you’ve seen one online source for an “excellent condition” trade-in value and a dealer comes in significantly lower, you may feel that the dealer is taking advantage of you because they don’t agree with your figure.

This is the point in the sales process in which negotiations can stall or the customer gets frustrated and leaves. Before this happens, ask the sales consultant to explain how they came up with their figure. You might have to speak with the used car manager in order to get that answer, but with your research behind you, an open mind, and an open dialogue you will be better positioned to get past the trade portion of the transaction and focus on getting an all-around good deal on a new car.

Obviously, if you want to get the absolute highest price for your car, a dealership isn’t the best buyer – you’re better off finding a private party to buy the car. Next week, we’ll talk about selling your car on the private market and how to get the best price possible.

What questions do you have about the trade-in process? Let me know and I’ll try to answer in the comments.