Why is certain optional equipment worth so much more than other options that might cost the same or more when new?

This is another great example of the law of supply and demand being extremely demonstrable in the used vehicle market. When new, what manufacturers charge for options is largely dependent on the expense to produce the option. When used, the value of options is much more dependent on demand. Diesel engines, for instance, in a 2004 Chevy pick up retailed for about $5,100 and today they are so popular and relatively rare that we add $6200 for the option and that may not be enough. On the other hand in 2004 night vision was a $2,200 option on a Cadillac Deville and we have a $500 add for it, and that may be too much. Ultimately the value of options is determined by consumers. If they demand it and are willing to pay for it, it will have value, and vice versa. VW Jetta diesels (TDIs) cost about $1500 more than a comparable gas engine and today are often worth about $4,000 more. There is a large demand and short supply, and consumers are willing to pay a premium for them. On the other hand, few people care if the Jetta has OnStar, a $700 option, and consequently we have no add for it.  If I were a consumer and the Jetta fit my needs, I’d be standing in line for the new high tech diesel engine version soon to be introduced for sale in this country.

Best times to trade

Is there a good time to trade a vehicle? A bad time?

 In general you can count on the wholesale auto market being pretty strong from mid- January through May. June tends to be iffy, July and August declining steadily, September iffy, October & November often declining rapidly, December unpredictable (iffy).
So you can count on getting pretty good value for most vehicles in those January to June months when the market is strong and dealers are usually aggressively buying and trading. After that you are looking at a steady month to month decline culminating in the lows of October, November. I don’t think it is unusual for many vehicles to experience as much as 40-50% of their yearly depreciation during the three months of September, October, and November, so you can see that trading during those months can be problematic.  Of course if you have a convertible and live where it gets cold, the dead of winter would probably be a particularly bad time to trade it. Sometimes dealers with deep pockets and strong nerves stock up on convertibles in the late fall/early winter and sell them in the spring and make retail kinds of profits selling to dealers. Risky, but can be profitable.  Keep in mind that these are generalities and must be balanced against when it’s a good time to buy a vehicle (generally when manufacturers and/or dealers are desperate to sell, and that is less predictable).

How do retail values relate to wholesale values?

The primary factor driving wholesale pricing is what consumers are willing to pay retail for specific vehicles, the price point at which consumers are willing to purchase this vehicle rather than some other vehicle or at least consider them as equals in terms of value.  Wholesale values are then a result of the relationship between what consumers are willing to pay and the profit parameters – that is, what dealers determine they need to earn in order to sustain a business – of individual dealers. You can imagine that dealers are competitive. If consumers are generally willing to pay around $14,000 for a 2003 Honda Accord EX V6 4door with 60K and $14,000 for a Ford Five Hundred SEL with 25K, you will find that those vehicles will have very similar wholesale values even though they differ by 3 years and 35,000 miles.

Dealers did not decide that those two vehicles are worth similar money, consumers did. The relationship to wholesale values occurs because dealers have to make around $1500 profit on a vehicle such as that to sustain a viable business and therefore have to purchase those vehicles for around $12,000 for a well-reconditioned vehicle (leaving room for transportation, auction fees, clean-up, etc.) or trade one for around $11,000 (allowing for expenses to reconditioning it and prepare it for sale). If all of a sudden consumers decided that the Honda was only worth $13,000 retail, you would soon see a similar $1,000 adjustment in the wholesale value and the Honda would be worth about that much less than the Ford.  If another dealer decides he wants to make $3,000 per vehicle after expenses rather than $1500, he is either going to have to sell those vehicles for $15,500 instead of $14,000 or purchase them for $10,500 rather than $12,000. He will quickly find out the market won’t allow either of those things to happen.

Which options return the most value in relation to their cost?

Of course the aforementioned diesels often return well over 100% of their cost.  Some other options that are good buys are automatic transmission, 4 wheel drive, moon roof, leather (where it is expected), DVD players, navigation, third seats (in wagons and SUVs), heated seats (in colder climates luxury vehicles without heated seats can be extremely difficult to sell in the wholesale market), special wheels. Options that don’t hold value well can be such things as passenger power seats, headlight washers, certain engine upgrades (4 to 6-cylinders, 6 to 8-cylinders, 8 to bigger 8-cylinders), leather (where it’s not expected), Anti-lock brakes, heated mirrors.

How can I estimate the probable depreciation of vehicles I am interested in?

The best way to check anticipated depreciation is to estimate the transaction price of the vehicle you are considering, estimate the number of years you plan to keep it, and look up the wholesale value of the same vehicle that number of years older and subtract that number from the estimated transaction price.

For instance, if I’m interested in a 2005 Lexus GS330 and plan to keep it 3 years, I would look up the value of a 2002 model of the same vehicle and subtract that number from the estimated (or actual) transaction price for the 2005 vehicle to get the probable depreciation. 
2005 Lexus GS330:  $25,000 (estimated purchase price) 
2002 Lexus GS300:  $14,400  (book value)   

The difference between the two values is $10,600, so you could anticipate depreciation of that amount over 3 years.  These kind of estimates are very accurate unless there is a major (and significantly more desirable) redesign of the vehicle in question over that span of years.For instance, if you are considering a 2005 Mercedes E320 which was redesigned in 2003 and plan to keep it three years, you would be comparing its transaction price with the wholesale value of a 2002 model, the previous (and much less desirable and valuable) design. The anticipated depreciation would be invalid because the new design is worth considerably more than the old design. There is a $7,000 difference between the 2003 (new design) E320 and the 2002 (old design) E320, much more than one would expect if there had been no redesign involved (the difference between a 2004 E320 and the 2003, both new designs is only $3,300, the difference between a 2002 E320 and a 2001, both previous designs, is only $2100). That throws the calculation off considerably.

Why do some vehicles depreciate so rapidly? Which are among the worst?

Used vehicle pricing is a great example of the law of supply and demand. Vehicles that depreciate rapidly have a much greater supply than demand which obviously puts downward pressure on their pricing. They are readily available and not highly sought after, so essentially the only way to make them sought after – create demand – is to make the price overwhelmingly attractive. A 2006 Chevrolet Impala LTZ and a 2006 Honda Accord V-6 comparably equipped each cost about $25,000 when new. Today, about two years down the road the Accord is worth $4,000 more than the Impala.

 

Primarily because of fleet sales (sales to rental car agencies in particular) and heavily incentivized leases, there are many more Impalas returning to the market and little demand compared to the comparable Honda. The only way for the Impala to compete for the hearts, and dollars, of the retail consumers is to be priced significantly lower than the comparable Honda. A$4,000 savings can be very enticing for someone just looking for basic transportation.

 

The worst performing vehicles in terms of retaining value as used vehicles tend to be the domestic vehicles that are highly incentivized when new (they need to be in order to create demand vs. their more popular import competitors) and those with large fleet sales. Cars like the Chrysler Sebring, Chevy Malibu, Ford Taurus, vans like the Ford Freestyle, Chevy Uplander, Dodge Grand Caravan, and SUVs like the Chevy Trailblazer, Ford Explorer, and Dodge Durango are good examples. Compare a Ford Freestyle with a comparable Honda Odyssey or a Chevy Trailblazer with a comparable Toyota Highlander and you will see what I mean.

How much do dealers make on a retail sale?

That’s very hard to say. In general, the lower the price range of the vehicle, the less a dealer has to spend reconditioning a vehicle, and the lower his expense structure the less profit he can afford to make. Typically a dealer can sell a lot more $10,000 vehicles than $30,000 vehicles (there being many more consumers looking for used vehicles in the $10,000 range than the $30,000 range) and a dealer selling $10,000 vehicles typically has a more modest expense structure than one selling $30,000 vehicles and can therefore sustain his business with less profit per car. It is also typically much more expensive to recondition a $30,000 vehicle out of warranty than a $10,000 vehicle. These are the primary factors determining profit structure. It is a highly competitive business and shopping around will almost always lead you to dealers with competitive pricing and profit margins.