Thursday, December 12, 2013

When Should You Sell Your Car? (When it is Still Running)

 While it is a good idea to hang on to a car for as long as you can, there comes a time when you will eventually have to sell it.   When should this be?

I recently sold my X5 on eBay.   In a way, I didn't really want to sell it.  But I took my reluctance to sell as a good sign.   Just as they say "the best time to look for a job is when you already have one" sometimes it is best to sell and move on while a car is running well, and maybe just a little bit before you are ready.  Why is this?

I loved the X5 and it was well-engineered.  But it was an expensive vehicle, and even doing the repairs myself, the costs were pretty high (and pretty frequent).   Throw in 93 octane gas, prescription motor oil (all 7 quarts of it) and mail-order oil filters, and well, it got old, real fast.  The $300 tires were not any fun, either.

We take a two-month trip North every summer, towing a camper, and after 150,000 miles, my partner was getting worried about getting stuck somewhere when the car broke down. And on every trip, something would break - which is normal on an older car.    It was an ignition coil last time around.  A radiator cooling tank the time before.  The alternator before that.  I was able to fix all of these within a day, but it meant delaying our trip and also caused stress.

We got back from the last trip, and after replacing the ignition coils, the window regulator, and the door handle (which is #3 for this car), everything was in working order.

So I decided to sell.   Why?  Because everything was in working order.   It is easier to sell a car when it is running, than wait until everything is broken.

Two friends of mine did the opposite.  It is human nature.   Why sell your car, when it is running fine?  Right?

The first one had a boat.   It was in running order, but he had stopped using it.  He said, "Why sell it?  It is a nice boat, and I might use it!  It's not costing me anything!"  (It is, actually, in depreciation, but that's another story - and another posting).   So he kept it two more years on the trailer, turning down an offer for $6000.  He took it out one year and the engine blew up.  The transom had rotted out and the motor was shot.  He gave it away for scrap.  If he has sold it when it was running, he would have gotten $6000 for it.   Once it stopped running, it was worth nothing.

My other friend has an old Mercedes that he paid $60,000 for.  It is worth maybe $6,000 now and he said, "I'm not selling that car for so little!  I paid $60,000 for it!"   But it is 20 years old.  He rarely drove it.   And eventually, the battery went dead, and he stopped driving it.   He tried to start it the other day and the gasoline in the tank is sludge and the fuel injection system clogged.   At this point, you can't give it away.
His widow will probably donate that car to charity for a pitiful tax write-off.

Better to sell when it is working, get a little money for it and have an easy sale, than to wait until it is shot and then try to donate it to charity.

At the other extreme, another friend of mine finally bought a car, after leasing a string of $35,000 pickup trucks.  Yea, they have a new smartphone, too. The car is now two years old, and they have four more years on the loan.   He says to me, "Time to trade it in on a new one".   When I explain that he is likely upside-down on the loan at this point, he says, "well, no big deal.  You'll always have a car payment, your whole life, right?"

I was ready to scream.

But it illustrates that there is a happy medium between "drive it into the ground" and "Let's trade cars every two-three years".   There is a "Sweet spot" of car ownership, between brand new and clapped out, when the cost of ownership is at the lowest point - in terms of the depreciation curve and theWeibull curve.

In general, most modern cars will easily go over 100,000 miles without difficulty or major breakdown.  Most will go to 150,000 miles.   This means 8-10 years of trouble-free driving.  So keeping a car for 8-10 years and 100,000 to 150,000 miles is a good basic target.   Yes, you can go longer and drive a car "into the ground" - but that requires a little more effort on your part.   And it means a car that you really can't take on long trips, as it might break down and leave you stranded in the middle of Oklahoma - and at the mercy of the nearest garage mechanic.

And yes, there is an insane logic to owning a clunker - but you have to be pretty clever and astute to make it work - economically.   For the rest of us, who might not be mechanically inclined, it pays to fish further upstream.  Of course, your old Honda or Toyota might make a good hand-me-down car for your kids.  Older cars are cheaper to insure, and odds are, a kid will trash the car in short order, anyway.   But don't expect your kids to be grateful.  Today, the average middle-class teen expects a brand-new car for their 16th birthday.   And if you don't buy them one, in a few short years, they'll convince Grandma to co-sign a loan so they can have a "reliable car to get to work."  Or maybe weekend Dad will buy them one - out of guilt.

Of course, getting rid of a clunker is problematic.   Once they go bust, all you can do is sell them for parts or scrap - or donate them to charity (which is akin to giving it away).  But at that point, a high-mileage clapped-out clunker isn't worth much.   If you are handy with tools and don't mind driving a piece of crap, the clunker thing could work for you.   But most Americans don't have the time and patience for this, so we won't leave it on the table as a realistic option for most people.

Trading in cars every 2-5 years, on the other hand, makes no economic sense whatsoever.   To begin with, as I noted in my Hidden Costs of Car Buying, you will have to pay sales tax on each one of those cars.  If you trade every five years, instead of every ten, you double your sales tax burden, which on a $25,000 car, can be about $1500 each time.   You also are taking the biggest hit in depreciation, in terms of dollars - whether you buy new or used - as the highest depreciation occurs when the car is the newest (as the value is greater).  Unless you are really rich and can really afford to squander huge sums of cash, this is not a realistic option, either.  And no, you can't "afford" to trade-in or lease new cars every few years, if you are at the same time complaining about being broke all the time or underfunding your 401(k).  Let me put it this way - if you are reading this blog, odds are, you can't afford it.  So we'll leave this option off the table as well.

So when should you unload a car?   Like I said, about 8-10 years and 100,000 to 150,000 miles are pretty good targets.  But here are some other criteria you should consider:

1.  Have you stopped using the car (boat, motorhome, etc.?)   If not, think as to why you are keeping a vehicle you don't ever use - or use rarely.   Many people make the mistake of buying a new car and then saying, "Gee, we'll keep the old one, as it still have some life left in it!"   But the battery goes dead, and the gasoline in the tank turns to sludge - and the cost of owning an extra car, while not readily apparent - starts to drain your finances.   If you have more cars than people in your house, something isn't right.  And I know this, as I used have six (cars, that is) and it was bankrupting me.   Cars are like fresh fruit - use 'em or lose 'em.   Better to have one car and drive it a lot than to have multiple cars and drive them rarely.

2.  What is your use of the car?  If you are commuting to work, and don't mind being late once in a while (if the car breaks down) then you can afford to have an older car and not worry so much about being stuck.   If you have AAA, the car can be towed to your trusty local mechanic (or your garage) for repair.   But if you travel long distances, an older car might not be such a smart choice.   Breakdowns in remote locations mean than you have less choice as to who is to repair your vehicle - if indeed anyone there is capable of repairing it.   For example, driving the X5 in Labrador was an interesting experience - we kept wondering what we would have done if it had broken.   AAA might not work in Canada - and spare parts would have to be flown in or take a week to arrive.

3.  How Old is the Car?  And by this, I mean age in years.   Cars rot, like fresh fruit, even if they have "low mileage" on them.   And lower mileage cars are not worth a lot more than high mileage cars, as a result.  While a garage-kept car might last 15 or 20 years with no difficulty, cars left outdoors after two decades start to look pretty ratty, and many parts start to degrade, just from time and the elements.  Things like oxygen sensors wear out over time, as well as mileage.  Rubber parts rot, fabrics fade and tear.  Very few cars look nice after 15 years.

4. How Many Miles on the Car?  Again, mileage is not necessarily indicative of age.   A lot of highway miles put little wear on a car, whereas city driving can wear out a car fairly quickly.  But again, the odds of you reaching the fabled 300,000 mile club are pretty slim.   Most people who drive a car this far, drive an awful lot every year - 25,000 to 35,000 miles, or about double the national average.   There are few 20-year-old cars that make it to 300,000 miles, but plenty of ten-year-old cars driven by fools who fail to grasp that they are driving their lives away, 30,000 miles a year.

5.  What Condition is the Car?   Is the headliner starting to sag in spots or have some tears?  Are there nagging issues with trim, accessories, and electronics?  Will it be due for tires, brakes, struts, oxygen sensors, fuel filter, spark plugs, or other maintenance and repair items?   As I noted in my Fright Pig article, once a car hits about 100,000 miles or so, it may need a lot of repair and maintenance work.  Cumulatively, these repairs and maintenance items could end up costing thousands of dollars, particularly if the work is done by a mechanic.   Is it worth throwing $5,000 at a car worth maybe $10,000 on a good day?

The point is, as with everything, moderation is the key.   Going to extremes trying to keep a car alive forever can be more expensive than buying a new one.   And yet many self-styled "frugal" people do this - throwing hundreds of dollars a month at a car for repairs, and ending up with a ride that is uncomfortable, unreliable, and worth very little.   A minor fender-bender is often enough to total the car.   Or after throwing thousands of dollars in maintenance and repairs, a "big ticket item" like the engine or transmission blows up, and the cost of repair exceeds the value of the car.

Yet many people do this - throwing more and more money at older cars, convinced that "this time, it will be fixed, for good!"   Usually, these folks are not car people or people with a background in science or Engineering. They assume that "but for" some worn-out part, the car would otherwise be in perfect condition.  They assume that if all the broken parts on an older car can be replaced, it will run like new.  They assume wrongly.

Cars, like computers, houses, buildings, appliances, and even people, have a design life.   They are engineered to run for a designed service life, and then to be scrapped.   Depending on care and the law of probability, some run longer, and some run less, than this designed service life.   And a few are taken out of service and become "collector's items" which are not really cars anymore, but talismans of cars.

So you have to know when to quit - at a reasonable time.   And one way to do this is to set a goal for yourself.  When we bought the BMW X5, it had 50,000 miles on it, and cost $25,900.   I figured if we could get about 100,000 miles out of it, that would bring the depreciation down to less than 25 cents a mile.  Since it sold for $5700 (about $250 over trade-in or private party sale) the actual depreciation was about 20 cents a mile.

We could have easily gotten an additional 50,000 miles out of it, without much maintenance, I think.   The only major component in question was how much longer the clutch would last.   Some owners reported getting over 180,000 miles out of a clutch (and still running).   But most of the major systems were in good repair, and all the maintenance items (oxygen sensors, spark plugs, ignition coils, fuel filter, fluids, etc.) had been changed out.

But two things gave me the impetus to sell.   First, the small repairs on our long trips (which are an annual occurrence) were getting annoying.   When a car breaks down in a strange town, it can be stressful.  Second, the car had some life left in it, and everything was working on it - so it was a good time to dispose of it.   For $5700, it represents a good piece of transportation for the new owner, who can probably put 50,000 miles on it with no difficulty other than putting a new set of tires on it, eventually.

And I am at a point in my life - with no debt and a net worth well over a million dollars - that I truly can afford to buy a car.   The insurance cost is negligible, and the dent to my net worth is less than it fluctuates on a monthly basis.   So maybe it was time to move on from the X5.

The car also had some practicality issues.   While an SUV is supposed to "haul things" you'd be surprised how little you can fit into these vehicles, compared to say, a minivan or pickup truck.  With four passengers aboard, there is barely room in the back for luggage for two.    So we ended up with a "rocket box" on the roof, which was cumbersome and awkward.

So, what to replace it with?    The following criteria had to be met:

1.  A Tow rating of at least 5,000 lbs (more than the weight of the trailer).

2.  Room for four adults (our other car is a 2-seater, and owning two 2-seaters is not practical)

3.  Something that can haul fairly large items (again, the roadster doesn't do this well).

4.  Reasonable gas mileage (this conflicts with 1-3).  At least 20 mpg for a truck.

5.  Simple and cheap.  No AWD or 4x4 or fancy gadgets.

6.  Has to fit in the garage.

The new medium sixed SUVs are all based on car chassis (the Taurus, Impala, Camry, etc.) and thus have AWD and FWD options.   The FWD models are usually a lot cheaper.  However, most have very little cargo space and since they are of unibody construction, their tow ratings are limited.   SUVs are also very expensive as well - with most topping $30,000 or more, even in base trim - and even with rebates, etc.   Used ones are not much more of a bargain.

We had been looking at these Nissan Frontier mini pickup trucks (4-door), as they have a decent tow rating (6,500 lbs) for our trailer and are cheap (maybe $25,000 new, a lot less used).   It also fit in our garage, which a larger truck would not do.  We put a Leer cap on it (painted to match), and it holds a lot of gear for camping.

Nissan has been reducing the price and adding features to their mini (more like midsized) trucks for several years now.

Like I said, we had been looking at them for three years.  And each year, Nissan has lowered the base price of the truck, and added more features to the option packages.   What really stopped us from buying one (and I know this sounds stupid) is that they were all either silver or white (neither of which is a color) and when I saw this graphite blue one, at a reasonable price, I decided maybe it was time.  Negotiated the price over the phone, checked all the online sources for a "reasonable" price for such a vehicle, and did the deal in about an hour.   Was it a smart move?   Not necessarily.  You never make out buying a car or truck - they are worth less than you paid for them the moment you buy them.

The only "gadget" it has on it was a backup camera and backup sensors.   And these are pretty practical gadgets to have (I installed one on the X5 as you can't see out the back of that thing, either).   The rest is fairly simple - power locks and windows, remote keyless entry, cruise control.   It does have bluetooth and a decent iPod interface on the stereo.   But other than that, it is pretty basic.

By the way, Hertz has a lot of these for sale for about $21,000 used, which is not a great price, but OK.  Most have 20,000 miles on them and are mid-range loaded SV models.   The only thing about buying a used rental car these days is CarFax, which brands your car with the red letter "R" on it.   I think they need to tweak their prices a bit, but supposedly, they do offer $1000 off.  If you are not concerned about resale value, it might be a good option, as well as looking in the late-model used market.

Sadly, these mini-trucks, like Jeeps, get "modded" a lot, as their primary audience, particularly for the 4x4 models, are young men.   They tend to beat on them and add questionable modifications.   Thus, it is hard to find a late-model used one (I found only two, 200 miles away, in Florida).   The 4x2 models are more "old men's trucks" - the type of ride favored by middle-class retirees.   So it is official, I am now an old man.

It burns 87 octane gas, and the oil and filters are available at Wal-Mart.  The 16" Goodrich tires are sold at the wholesale club for under $100 each.  Sometimes it is good to be one of the plebes.  Esoteric is nice and all, but expensive.

It certainly is no BMW, by a long shot, but it cost less to buy than the BMW did, used, 8 years ago.  And it hauls more cargo than the BMW did.   But, boy do I miss those leather seats!
And I intentionally bought below my income and wealth level.  I could have afforded to buy a more expensive car, but why bother?  Some of my neighbors think it is pretty funny.   But I really don't care what they think.  They have mortgages.  I don't need a car to impress them.

I bought the truck in RWD, as the 4x4 option was a lot more expensive, had worse gas mileage, and a lower tow and cargo rating.  And with age, comes service problems with four-wheel-drive.  We live in Georgia (no snow) and don't go off-road.  I don't need a 4x4 vehicle.  The 4x4 models do "look cool" though, all jacked up, which is why I think they sell a lot of them to young males.

And there are still station wagons out there - Volvos of course, and the Jetta and Passat Wagons, which are practical cars for hauling people and things.  Mercedes has nice ones, too.  But after working on my friend's Mercedes, I am not sure I want one.  They are a nightmare of complexity.
We went with the truck as it has the tow rating and a full-frame.  Not much is made anymore with a full frame.  If we didn't have the trailer, we would have looked at a wagon, I think - probably a VW.   Maybe an older 3-series wagon.   I look at this truck as an intermediate vehicle.  We will put 100,000 miles on it, maybe, and then move on to something else, once we stop RVing.    Again, have a plan, up front, on how long you want to keep a vehicle, and it will help you know when to sell.   So maybe in 2021, the Nissan will go on eBay with 120K on the clock.

But who knows?  Maybe we'll have this one longer.   We'll see.  I am not emotionally attached to it, but I guess that means I am getting older.