Friday, December 5, 2008

Vehicle Madness - Knowing When to Unload

There comes a time when you should sell a vehicle - if you are no longer using it.  Many men, in particular, hang on to equipment far longer than they should.

You will note in my articles I do concentrate a lot of maintaining and owning vehicles. In the United States, a country with 300 million people and 330 million cars, owning a car or other vehicle is a common occurrence. Unfortunately, for many people, it can also be a black hole for money.

One big problem is that people don't hang onto their vehicles long enough - particularly their primary transportation vehicle. Many folks trade and sell their cars every two to three years, and end up paying top dollar for their transportation needs (by paying all that depreciation).

At the other end of the spectrum, there are folks who hang onto vehicles too long, usually out of pride. And in many cases, these are vehicles that are for recreational or hobby use, such as boats or recreational vehicles, which can cost an enormous amount of money. Not properly cared for, such vehicles and drop in value to near zero in a matter of months.

This article is addressed toward the latter problem.

To counteract this problem, I created a simple financial rule: If you have not used a vehicle in six months, and have no bona fide intent to use the vehicle in the next six months, sell it, period. The depreciation (and neglect) of a year or more will more than counteract the transaction costs involved. If you decide a year later you need such a vehicle, you can easily purchase a similar one to use.

The problem many folks have with vehicles is that they believe theirs is something unique or special. They hang onto their old car, boat, jet-ski, or motor home, convinced that "not many were made in that color" or that it is somehow otherwise collectible. Nothing could be further from the truth. These types of things are made on an assembly line, and every few minutes another one pops off. Whoops, there goes another one. And another. And another.

Even "collectible" cars that are no longer in production are readily obtainable. Old muscle cars from the 1960's were made in the millions, and hundreds of thousands are still on the roads or in garages. If you sell one, chances are, you can buy the same, or similar car, down the road, for about the same amount of money (plus inflation). Hemings motor news is full of such cars for sale, month after month. They are not as "rare" as you would think.

However, the problem I am referring to here is not directed at Jay Leno and his car collection, or any other serious car collector who has a garage full of meticulously restored cars kept under dust covers. I am referring to the average middle-class Joe or Jane, who has a boat, or car, or RV, that ends up being a financial nightmare, because they don't sell when they should.

The following examples illustrate why my six month rule makes a lot of sense:

1. Joe wanted a boat to go fishing in with the wife and also take trips. Driving to work every day, he saw a boat parked by the side of the road with a "for sale" sign on it. Buying anything because you drive by it every day is the worst way to go about it, by the way. If you decide you must have a boat, RV, or motorcycle, research them thoroughly, and then go out and look at a dozen or more. Impulse buying something because you see it every day is never a good idea.

Joe paid too much for the boat because he didn't do the research. It was an older boat and old boats can be a nightmare of repairs. To him, however, it looked impressive - all those electronics (outdated) and features (mostly broken) and that big engine (in need of an overhaul). So he paid the asking price and towed it home.

For the first year, he and his wife used the boat a bit. His wife wanted a smaller runabout, not a cabin cruiser, and she was not happy with the purchase. They used the boat less and less. Eventually, they stopped using the boat entirely. It sat on its trailer for a year in the yard, gathering leaves and mildew.

Joe tried selling it, but convinced the boat was worth a fortune, he turned down several offers - offers that were at or above the NADA "book" value for the boat. Joe told me "It has been my experience that what something is worth is what someone are willing to pay for it," which of course, makes no sense at all. Joe was certain that the "right person" would come along and pay him the same price for the boat that he had paid. There is a shortage of such people in the world, however. Pride prevented him from taking a hit and moving on. After sitting for two years, Joe decided that if he couldn't "get his price" for the boat, he'd take it out for a spin.

The results were predictable. Boats and other machinery do not like to SIT for long periods of time without use. Engines seize, wood rots, and rust, decay, mildew, mold and algae get all over everything. The boat died on his first trip out, and now needed a whole new engine. Joe ended up scrapping the boat after he realized that the cost of a new engine and other repairs would exceed the book value of the boat. Also, the boat market had collapsed along with the economy.

If Joe had sold the boat when he first stopped using it, when he got good offers for it, he could have banked that money and later on, if he decided to start boating again, he could have bought a similar boat with the money he got from selling the old one. As it worked out, Joe ended up with nothing.

Note that Joe's problem is one that MEN in particular seem to have a lot. They believe that "giving up" on their hobby, be it airplanes, motorcycles, RV's, boats, or whatever, is somehow giving up on their life or giving away some part of their masculinity. As we get older, having a lot of "toys" gets to be more of a burden than a pleasure. I for one, will be quite content on the day I give up my boat and RV. I will have had my fill and be ready to move on, with no regrets that I am leaving anything "behind." Life is finite, and there is no sense wasting it trying to "hang on" to an earlier era in your life.

2. Suzie and James went to the boat show. Boat shows and RV shows are fun to go to, if all you do is LOOK at the wares. NEVER, EVER buy a boat or RV at a show. To begin with, buying any of these things brand new is the worst way to go about it. And as we shall see, the people with the most problems with these "toys" often buy them at shows.

Anyway, Suzie and James saw a cute runabout on a trailer at the show. Living near a lake, they thought it would be fun for the whole family to go boating, particularly after watching a video of a fun family enjoying a day at the lake. So they signed the papers and bought the boat on installments. They had never boated before, so they had no idea of what they were doing or how much a boat like that was worth. It seemed like a bargain, all shiny and new - for less than the cost of a new car! They paid too much for the boat.

They took the boat out once on the lake. Trailering a boat is never easy, as you have to get up early on the weekend, fight the lines at the boat ramp, launch the boat, and then schlep all your gear onto and off the boat. Once they got out on the water, they didn't know what to do. It was a windy day, and the boat slammed the waves. Suzie didn't enjoy this, and the kids, sitting in the back and getting wet, got restless and antsy. It wasn't like in the brochure, where family harmony reigned, and everyone went swimming and had a picnic! A major family argument and meltdown ensued. Discouraged, they headed back to shore and brought the boat home, never to use it again.

Suzie and James knew nothing about boats. So they didn't realize that their stern drive needed to be winterized to prevent the engine water jacket from freezing. The first winter, the engine block cracked, although they didn't know that. The boat filled with dead leaves and brown water, and the battery went dead. One trailer tire went flat. Suzie and James could barely make the boat payments, with the expenses of raising a family and all, so paying to winterize, maintain, and store the boat were out of the question. They thought they could "afford" the boat, but failed to take into account the regular maintenance expenses.

More disturbingly, they were "upside down" on the boat - they owed nearly $15,000 on the boat and the day they bought it, it was worth only $12,000 due to depreciation. After three years sitting in their yard, the boat was worth little more than scrap value - perhaps a thousand or two. It needed a new interior, new engine, new battery, new trailer tires, new everything. Other than the trailer frame and the hull, the boat was toast, all from stupidity and neglect. Ironically, Suzie and Frank were both college graduates - James with an advanced degree. They were not dumb people, they just chose not to educate themselves about a very expensive purchase.

For a young working couple, it was a $15,000 mistake. However they could have bailed out early on if they had sold the boat after their first disastrous outing - and taken only the $3000 hit in depreciation. The problem is, Suzie and James didn't have $3000 in the bank to pay the difference between the sales price of the boat and the amount owed on the loan - so selling it was literally impossible for them. They thought they could "afford" the boat in terms of monthly installments, but failed to think about the larger picture. After five years, they paid off the boat loan and donated the now derelict hull and trailer to a local charity for a tax write-off.

Such a waste. A brand new boat, with only hours on the engine, completely destroyed through ignorance. And the damage to their bank account!

Now, multiply this story times a million or more, and you'll understand why throughout America, there are derelict boats and RVs parked in yards in every neighborhood. Suzie and James' story is not unique by any means.

3. Hank was retired and wanted the boat of his dreams. He bought a 40 foot Sea Ray, a monster of a boat, for $200,000 in 1985. When brand new, it was quite a ride. All shiny and sporty. He and his wife toured the canals of South Florida and visited restaurants along the Intracoastal waterway. For the first few years, it was fun. Hank's wife, however, was not comfortable taking the boat out into the ocean or rough water. Hank went out fishing a few times with friends, but it was not as satisfying as he thought it would be. They never took the boat on the long trips they talked about.

The boat started getting used less and less. Like about half the boats in any given marina, it rarely, if ever, left the dock. Hank would stop by and "tinker" with it on weekends, noting, with despair, that yet some other item on the boat needed fixing or had fallen into disrepair. The boat was no longer shiny and new after a decade in the Florida sun, and it was hopelessly out of style as well.

He thought about selling it, and even talked to a boat broker. The broker told him that in the present condition the boat was in, it would fetch maybe $20,000 or so. Hank was infuriated! He had paid $200,000 for the boat! It was worth at least half that, right? Hank's problem with perceived value of an object versus its market value, is something that we will see is quite common.

Hank decided that he would get back into boating. He had the boat hauled and the engines worked over. He installed a new generator and air conditioning, on the premise that his wife would use the boat more often if the outside area (under canvas) was air conditioned as well as the below decks. He spent over $30,000 on repairs and upgrades.

He took the boat out again with his wife, and discovered that she still didn't like boating with him. After they had seen every inch of every canal in South Florida and visited every restaurant, they realized that they had "done that" and it was no longer of interest. And the cost of fuel was staggering. As they got older, schlepping stuff on and off the boat got to be more of a chore, and boating was no longer fun. They had outgrown boating. It was time to quit.

So Hank put the boat up for sale again, slashing his "asking" price to $80,000. After all, he had just "invested" $30,000 in it, right?

What Hank failed to realize is that there are a lot of hoary old boats out there for sale, and his was nothing special. The $30,000 in maintenance was just that - maintenance that is required for depreciating assets like a boat. Maintaining the boat did not make it worth more than any other well-maintained boat. And his boat still had numerous "issues" including a funky mildew smell below decks and many small broken things, as well as torn canvas and seats, faded fiberglass, and a generally derelict appearance.

Boats like Hank's eventually end up getting sold - when the owner dies. When Hank passed away, his wife sold the boat to a dealer for a few thousand dollars. In addition to the money lost by such a "fire sale" price, Hank's widow was out all the money Hank had wasted in trying to "upgrade" the boat, as well as the monthly maintenance and storage fees Hank had paid over the last decade or so.

Again, as I noted in my article on Hobbies (see Hobbies Run Amok), it is quite possible, and in fact, LIKELY that you will outgrow a hobby over time. Boating loses its allure over time, and you should be prepared for the "end game" of any hobby, whether it be boating, RV'ing or motorcycling (the latter being the worst in this regard, as "die hard" bikers refuse to give up their rides until far too late, oftentimes with fatal results).

4. Henry wanted a motor home - not just any motor home, but a Bluebird Wanderlodge motorhome. He bought one brand new from a local dealer for $200,000, which was a lot of money back in the 1980's. After a few years, he "traded up" to a newer model, spending yet more money on a 1987 model.

Fast-forward 20 years and the once-new motorhome is now a pile of rust. Henry parked it at an RV park in Florida, where the salt air attacked the unique steel chassis and body of these cult-classic motorhomes. After it had sat for a few years, Henry tried to start it. The piston rings on one cylinder (the one with the open intake valve) had rusted to the block, and the engine needed a total rebuild.

Henry, like most of the folks in these stories (and many, many others) seemed to believe that a motorhome or boat or whatever was an investment, not a depreciating asset. Moreover, Henry foolishly believed that you could just "park" a complex mechanical object like this, and without any maintenance or service, it would not degrade or decay over time. Storing boats and RV's requires some work to help reduce (but not entirely prevent) the degradation that occurs over time. Keeping them INDOORS is the best way. Once left to the elements, they deteriorate quickly.

Henry had the motorhome towed to a dealer, and the diesel engine was overhauled. New batteries were installed and six new Michelin bus tires were mounted. The total bill was over $20,000. Henry decided to drive the coach "up north" and discovered, to his dismay, that it seemed harder to handle than it used to. Of course, part of the problem, in addition to the worn-out suspension, was that Henry was over 80 now, and driving such a large coach was a lot harder to do at that age.

Henry decided to sell the coach, asking a modest $80,000 for the rig - despite the fact that most rigs of such age - in pristine condition - sold for less than half that. After paying storage fees for two years, Henry dropped the price to $40,000. Finally, he let the dealer take it on consignment for $20,000.

Unfortunately, the rig was worth maybe $5000 - about its scrap value. One could pull and sell the rebuilt motor, wheels and tires and sell some components to other Wanderlodge owners and sell the body for an easy $1500 in scrap metal. But to restore the coach to its former glory would cost tens of thousands of dollars - and better coaches could be had for far less than that. It was the end-game for this once proud "Bird".

Henry would hear nothing of it. The coach was a steal at 20 grand and that was that. Like Hank's boat example above, the coach sat for a few more years and finally was sold when Henry died. The widow sold it to the dealer for a pittance. The dealer quickly sold it on eBay for a pittance and a penny.

Again, the mistakes Henry made were trying to "resuscitate" a dying vehicle, much as Hank tried to do with his Sea Ray. He spend tens of thousands of dollars "repairing" something that was not worth repairing. Like Hank, he refused to see that the value of the object, as determined by the many book values (NADA guides, Kelly Blue Book) was far less than he thought. And like Hank, his widow ended up selling the boat for nothing after it was all said and done.

Henry should have realized that with advancing age, eventually one has to give up on large complex vehicles and that it's OK to do so. Rather than spend tens of thousands of dollars trying to bring back the past, Henry should have sold the coach once he stopped driving it and bought a trailer for his Florida RV park. If you are going to park an RV in a trailer park for years on end, buy a trailer instead of a motorhome. They are much cheaper to buy and less complicated to maintain.

* * * *

These examples illustrate why it is a very good idea to buy something secondhand first, before you decided to commit from a hobby. When I say secondhand, however, I do NOT mean from Hank, Henry, Joe, or Suzie and Frank. I've seen, firsthand, the Boats, RVs, Cars, and other vehicles from these "time wasters" who think their clapped-out pieces of garbage are worth as much as a new unit in pristine condition.

I've driven hours to check out a boat that the owner said was "pristine", only to arrive and find that the engines are nearly shot, the boat is covered in bird poop, and the hull is covered with barnacles and algae. When I tell the owner that their POS boat is a load of junk, they get angry - their boat is a BARGAIN at only $10,000 OVER book value!

Why folks harbor these delusions is beyond me. To some extent, I guess it might sometimes work. Some "chump" (like Joe in the example above) will over-pay for a clapped-out old boat, as he hasn't done the research properly. But with the advent of the Internet, where "book values" and comparison shopping are just a mouse-click away, it is getting a lot harder to find "chumps" who will buy clapped-out junk for over market value.

By the way, if you run into such a delusional JERK, just WALK AWAY, period. In the first place, their clapped-out RV or Boat is probably not salvagable anyway, so there is little point in negotiating on price. Oftentimes, even if the owner GAVE you the boat or RV, you'd spend more on repairs than the thing would ever be worth. In the second place, these assholes will never come down on their price. They are delusional - insane. You can't argue with insane people.

If I sound a little harsh here, well, I just spent the weekend looking at Joe's clapped-out motorhome. Joe sent me pictures of the coach from when he bought it 20 years ago. Needless to say it looked quite pristine in the photos. When I arrived after a two-hour drive to a pile of rust and junk, needless to say I was not happy. And Joe couldn't understand why I wouldn't fork over 20 grand for his rig. Just walk away and chalk it up to experience. The worst thing you can do is try to negotiate with the Joe's of the world, or try to convince yourself that "It's not in THAT bad condition, right?" Just.......Walk.........Away!

It makes much better sense to find a late model unit, well maintained, and pay a lot less for it in the first place. Educate yourself as to what you are buying and what maintenance is required. Pay CASH for the recreational toy if you can, or put down a substantial down payment. That way, if you decided to bail out of the hobby, you are not "upside down" like Suzie and Frank, and you don't have to swallow your pride (and take a big depreciation hit) like Joe, Hank, and Henry.

Now the six month rule is simple to apply, although a lot of folks will cheat at it. For example, if you have a boat that you put in storage last year, and then a half the summer goes by without you using it, it is probably time to sell. Why? Because the boat is depreciating in value every day it sits, and it is degrading as well. Sell it before it is worth nothing. If you decide to get back into boating later on (not likely - why did you let it sit half the summer in the first place?) you can buy a comparable used boat for the same money. If you let the boat sit another winter without use, it will likely be in poor shape come next spring, and you'll have a tougher time selling it. Get out now, while you still can.

Simialry, if you are going away to college or in the military, it is better to sell off your car than to try to store it for a year or years. It will continue to depreciate over time, and the money you'd get from selling it would actually appreciate in a bank account. If you really need to, you can always buy another '87 Camaro later on. Trust me on this.

Now again, some folks cheat this rule by saying "Well, I have a bona fide intent to use it in six months" when in fact, they are lying to themselves. Some folks also think that such a rule might be wasteful. "Suppose I end up needing that object later on?" This is the kind of thinking that leads to hoarding disorder.

For example, I have a boat (two, actually, but that's another story). I decided to keep the boat in Florida, and the trailer sat in my yard in Virginia for a few months. After tripping over this thing more than once, I remembered my Six Month Rule and sold the trailer. I got a quick $1500 for the trailer on eBay. Used boat trailers, for some reason, are always in high demand.

Well, a year later - you guessed it - I decided to take the boat from Florida to my new home in New York. I would need a trailer to tow it there - and to store it for the winter. I should have hung onto that old trailer, right? Well, no, actually it all worked out. I could have bought a similar trailer for $1500 if I wanted to. But I found that a brand new trailer, with an aluminum frame, torsion beam axles, and disc brakes could be had for $3000. It was twice the trailer and brand new. So the $1500 I got for the old trailer ended up paying for half the new one. I got a new trailer, and for a year and a half, I didn't have a hoary old boat trailer in my yard, annoying the neighbors (or worse yet, paying storage on a hoary old boat trailer).

In nearly every case, the six month rule has saved me heartache. When we bought our condo in Florida, I sold the motorhome. My partner said "Why sell it? It's paid for!" But I pointed out that our chances of actually using the motorhome were probably nil - and it would require registration, insurance, maintenance, and would continue to depreciate over time. Better off to sell it now, while it was still in top condition than to let it sit for a year or two and then try to clean it up and sell it.

Note that this same "Six Month Rule" can be applied to almost anything you own. Oftentimes we fret and fuss about throwing something away or selling it because "I might need that someday." Someday often never comes and our heirs end up throwing away all our junk that we didn't have the heart to part with. And when this fear of loss becomes an obsession, a disease known as "hoarding disorder" can occur, which can be costly and heartbreaking.

Get rid of it instead of keeping it. The burdens of owning "things" can drag down your psyche and your wallet. Apply the Six Month Rule: If you have not used a vehicle in six months, and have no bona fide intent to use the vehicle in the next six months, sell it, period.