Monday, May 8, 2017

Should You Buy An Off-Lease Car? Maybe.

Leasing of cars for personal use has taken off in the last two decades.  The problem is, what do the car companies do with the cars when they come off-lease?

The car business is in trouble, again.   It wasn't hard to see this coming, as the car business is cyclical.   The economy gets bad, people put off buying cars.   The Edsel was a "lemon" mostly because it was introduced during a recessionary period when all car sales were down - the late 1950's and early 1960's.   Things were so bad, the car companies were offering "plain jane" no-frills small cars that actually got good gas mileage.  The Ford Falcon, Chevy II, and Plymouth Valiant all trace their roots to the recession of 1958.

Then the economy improves and everyone runs out to buy a gas-hog huge car.  In the 1960's it was the "muscle car" craze.   In the 2000's and again today, it is monster SUVs and pickup trucks.  This pattern repeats over and over again.

And today, it looks like recession-time.    Car sales are off as demand is saturated and production capacity far exceeds demand.  Interest rates are up and lenders are tightening lending rules, as defaults are on the rise, particularly on sub-prime loans.   Tons of cars are coming off-lease and resale values are less than expected, meaning that financial decisions made by car companies three years ago are turning out to be off - and estimates of resale prices turned out to be optimistic.

This does not bode well for the overall economy.  But I digress.

As I noted in other postings, the crazy system we have today, with CAFE requirements being what they are, the car companies have to sell a lot of small, economical cars to offset the horrible gas mileage of their SUVs and trucks.  The margins on cars such as sedans, is far less than on SUVs and in particular, pickup trucks.  The latter are large, empty steel boxes, basically, with suspension technology from 1955.  They are very profitable, and today you can spend $70,000 on a pickup truck, as insane as that sounds and is.

But it is an interesting system, as cars - that is to say cars and not SUVs and Trucks, are cheap, and since the margins are slim, as a consumer you get more bang for your buck.  And no, odds are, you are not going "off road" in you "adventuremobile" (as some millennials are calling SUVs) or hauling loads in your pickup truck (that would scratch the bedliner!).  For 95% or more of us, a car is really what we need, but a truck or SUV is what we want mostly for style reasons.   And please, don't try to deny this, it is a basic hard cold truth.

But the good news is, the poorest segment of the population thus can buy the most efficient vehicles for the lowest prices - that is good news, right?   Except that the poorest part of the population desires trucks and SUVs the most.   It seems the poorer people are, the more they crave status, and in the trailer part, a big pickup truck is status, as is an SUV.   And these are the yahoos you see on the nightly news, whining about gas prices every time they spike (which they do with regularity - I suspect we will see this happen in 3-4 years, like clockwork).

But once again, I digress.

All these off-lease cars - where do they go?   Mostly to dealers, and that is the conundrum.   As I have noted before and as all the car sites and magazines note, the best deal on a used car is often from the original owner.   You find a car for sale by a person who has all the service records, who washed and waxed it regularly, and most importantly, kept it in a garage.   You buy this for close to the "private party sale" price listed on Edmunds, KBB, or NADAguides, and you save about 10-20% off dealer list for a similar used car with an unknown history, and maybe 30-40% off new car pricing.

Those are great deals.  They can be hard to find.   They require you do some research and footwork, and have the car inspected by a trusted mechanic.   But it is worthwhile, if you want to find a decent car at an advantageous price.   A good price, not a "steal".   If you see a car for sale at a "too good to be true" price, chances are, the car doesn't exist and you are about to be ripped off.  Or if the car exists, well, something is wrong with it.   Whenever a seller has a "story" about the car (I have to sell this right away because....) walk away - they are trying to distract you.

Off-lease cars end up going to one of two places.   The dealer who leased the car originally may take it back as part of their used car inventory.   If the car is in really good shape, has relatively low miles, and is a model that is in demand, they may clean up the car, attend to any necessary repairs (new brakes, tires, whatever) and then put it on their own used car lot.  Such cars might still be under original warranty or even offered as "Certified Pre-Owned" cars with an additional limited warranty.

Of course, these cars are sold for top price - the "dealer retail" prices you see on KBB, NADAguides, or Edmunds (and I suggest you use all three pricing sites, by the way!).   Some dealers even charge more than "dealer retail" on the grounds they are "Certified Pre-Owned" or whatever.   Again, they are trying to sell "peace of mind" and when someone tries to sell you that, well, odds are they have one hand on your wallet.

The second outlet for off-lease cars is wholesale (dealer) auctions.   These are not open to the public, and by the way, you should avoid those auctions that are.   "Public" car auctions are where dealers unload their worst-of-the-worst - the  junk that just will not sell and other dealers won't even touch.  They give you only a few minutes to "inspect" the car, and then throw a bucket of water on it (so it looks wet and shiny) and then drive it into a crowded barn, where you bid against shills for the auctioneer.   Odds are, you'll end up with a car with some chronic problem, and end up paying too much for it.  Avoid at all costs.   Auctions in general are no bargain, as I noted before.

Dealer auctions are a different deal.  Dealers are more sophisticated that the average consumer.  They know the inventory like a horse-trader knows horses.  They know what will and won't sell on their lots, and what is a reasonable price to pay for such a vehicle.  They are also paying a lot less than you are for these cars.   Why don't they let members of the public bid at such auctions?  Good question - you'd think they'd get more money for the cars, right?   The problem is, the general public is a different audience, and it would be time-consuming and difficult to unload 1,000 cars in a weekend to Joe Lunchbucket, who wants to finance his purchase.

The dealers buying these cars could be anyone from a new car dealer (who has a used-car lot) or a primarily used-car dealer, such as the guy down the street with all those balloons and flags.   It could be a shafty "buy-here, pay-here" used car place that sells high-mileage clunkers to the plebes.   It could be one of these modern used-car chains as well (where else do you think they get inventory?).

The off-lease (and trade-in) cars sold at wholesale auction are not necessarily "defective" but may have some issues.  They may simply be more cars than a new car dealer can reasonably sell.  They may be models that are not as popular or profitable on the new car dealer's used car lot.   They want high-markup SUVs and trucks, not slow-to-move sedans, for example.   And is all about time on the market with selling cars.   You don't want inventory sitting around for months on end - your product is like fresh fruit and worth less and less with each passing day.   For a car that depreciates $3500 a year, for example (which isn't hard to do) you are looking at $10 flying out of your wallet every day it sits on your lot.

But some cars at dealer auctions do have issues.  They could be cars that were in an accident (which thanks to CarFax, we all know about - in most cases) or they could be cars with higher than average mileage, excess wear, or the like.

So, how do you tell?  And should you buy an off-lease car?   The answer is a solid "maybe".  And like anything else, you have to do some research and legwork before you make a decision.

For example, the X5 I bought was an off-lease car that had also been in an accident.  I was the third owner, at least the third person who owned and drove it.  The CarFax on the car told the whole story: 
For example, take my BMW X5, which is a 2002 model, now with 130,000 miles on it.  It is a decade-old car, worth maybe $10,000 on a good day.  But at one time, it sat shiny and new on the showroom floor, sporting a $53,000 price tag.   A Doctor in Naples, Florida leased it, initially.  Usually, most leases are for 24 or 36 months.

30 months into the lease, the car changes hands and is auctioned off.    What happened?  Well, as you might suspect, it was in an accident, but not one sufficiently large enough to be reported to CarFax.

It goes to one dealer, then another, and then is auctioned on eBay to a Dentist in Fort Lauderdale.  He owns the car for a year and then sells it to me, with three days left on the original warranty.  I buy the car, knowing it was in a wreck, as the price is adjusted accordingly.

How do I know it was in a wreck?  Well the paint on the front end was new (and unfortunately, the Dentist drove it across Alligator Alley during "love bug" season, and the front got etched) and the hood and fenders are new.   The radiator is new (2005 tag on it) and there is telltale signs of BMW's unique blue coolant leaving stains in the engine compartment.   So clearly, the car was in a front-end collision.  Not a major one, perhaps only 15-20 mph.  But these SUVs don't have serious bumpers on them, and they pretty much fold up in even a small wreck.

Front-end collisions are not as hard to repair, as most of the parts (hood, fenders, bumper, etc.) are bolted into place, not welded.  And the repair job was of reasonable quality.  So I bought the car.

Have I had any problems with it?  Not really.  Not any more-so that the ordinary BMW problems.  But on the other hand, if another car was parked next to it without the collision history, I would have paid more for that car.
I ended up putting over 100,000 miles on the car before selling it for about $5300 on eBay.  So it cost me about 20 cents a mile in depreciation - not great, but about on par with other cars I've owned.   The fact that it was leased originally and in a wreck, didn't seem to affect its overall reliability or durability.

But this story illustrates how you can sort of parse out how well the car was taken care of, by looking at the CarFax service history.   I was also able to get a printout of all the service work done on it from the local BMW dealer.   I don't know if they still do this, but they used to have service records for every car on their computer system.  So if it was worked on at a BMW dealer - anywhere - there was a record of it.  From this, I could parse out that the oil was changed regularly and the car had a lot of problems with trim and minor electrical issues (window motors and door locks - sort of a BMW thing, sadly).

Modern cars really require little in the way of maintenance, at least for the first 50,000 miles or so.   Oil changes are the big issue, really.  If someone didn't change the oil for the first 30,000 miles, well, the engine might have issues down the road.   But most lease agreements require the owner to maintain the vehicle regularly, usually by bringing it back to the dealer for regular oil changes.  Some carmakers, such as BMW include oil changes for the first few years of ownership, so there is little incentive for an owner to neglect the car.

If you can get this service history, so much the better.  As I noted in my "should you buy a used rental car?" posting, I was able to get the service records of my Toyota Camry from Avis.   They changed the oil about every 5,000 to 7,000 miles - perhaps a little longer than I would have gone for.   But the amount of "damage" if any from such long changes, was negligible, for a car with only 22,000 miles on it when I bought it.

So, over the years, I have bought one used rental car and one off-lease car, and didn't have any problems with either.  The prices were OK, not real steals, but not as high as dealer retail would have been, either.   But this is not to say this is what I would seek out as a first choice.

Again, if you can find that "cherry" car owned by the car nut who kept it in the garage and never let it get dirty - and has all the service records - that's great.   And hopefully, he didn't do something stupid like "mod" it with questionable aftermarket products.  That, quite frankly, was one problem I had in looking at used Jeeps (before I decided I didn't want one).   Most of the used ones were owned by kids who jacked them up and added a lot of oddball aftermarket crap to them, to the point where they weren't fun to ride in.   And being kids, they beat the crap out of them as well.   The same problem happened when I was looking at the Nissan pickup - kids buy them and have to "mod" them, and of course, beat the snot out of them.

So "original owner" cars are great - but you have to judge the quality of the owner, as well as the car.

Believe it or not, some people prefer to buy an anonymous used car.   I think they don't want to think of the car as having belonged to someone else, but rather be new-to-them.   So having the service records and meeting the owner are negatives to them.   This is, of course, emotional thinking at its worst.  But it seems to be a human thing.

The other issue is, of course, that some original owners are assholes.  As I noted in my "buying a used car, how to" posing, we went to look at a half-dozen Geo Prism (Toyota Corollas) and most were in decent shape.   The highest priced one was the one in worst shape - highest mileage, coffee stains on the seats, dirty paint, dirty engine, and a broken ABS actuator.  "You can fix that!" the owner said, as well as "my price is firm!"

Walk away from people who say either of those things - and people say that a lot.  "You can fix that" is the most idiotic thing in the world to say, if you think about it.  But again, we are emotional beings, and I have to check myself when I look at a car, boat, RV or whatever and see something broken on it that I literally can fix.   Part of me wants to "adopt" the vehicle and give it a good home.   But then I realize that the previous owner left a lot of stuff broken - and that's just the stuff I can see.   Walk away - don't feel sorry for inanimate objects!

The "my price is firm!" people are equally idiotic and often 5-10% over market value.  Just walk away.   Similarly, the "I don't really have to sell it" people are time-wasters as well.   It either is for sale or it isn't.   And perpetual "for sale" cars are a bad idea as well.

So I can understand why some folks shy away from dealing with individual sellers.   That means more bargains for the astute among us, of course.   Some folks like to go to a used car dealer because they think the transaction will be easier and more trustworthy.  This may or may not be the case.   Used car dealers (including CarMax) will try to sell you extended warranties, which as I have noted before, are not really good bargains.   They are trying to sell "peace of mind" which again, is a sign you should watch out.

Of course, some folks think otherwise.  This fellow on Jalopnik argues that you can enjoy a horrifically unreliable exotic car for cheap by buying from CarMax and then getting the extended warranty.   It is an interesting theory, but myself, I don't like spending a lot of time taking cars to dealers to get repaired.   Quite frankly, I'd rather have a car that just runs without any sort of fuss, period.   I am not sure that a Rage Rover [sic] is going to be a fun ride in any event.  They just seem to me to be overwrought pieces of crap, no matter how much "status" some folks think they project.  Frankly, most "luxury" cars are like that, I've come to realize, after owning a few BMWs.  I'd rather be in my Nissan, driving by the guy sitting by the side of the road in the Rover, waiting for the tow truck, even if he is sitting in Connolly leather and wool carpets.

But getting back to the topic of this post, an off-lease car is likely to appear on a used-car lot, so if you want to buy a late-model, low-mileage car, these are going to make up the bulk of the cars in inventory, and if you want a selection of model, style, and color, a dealer might be the only option for one of these cars.  It likely won't be a horrible deal, but it won't be the best one, either.