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.       

How important is color in determining a vehicles value?

 Very. We like to say that color can make as much as a 5% swing in value in either direction, positive or negative. A $40,000 2003 Mercedes SL500 in a good color can easily be worth as much as $2000 more than the same vehicle in a neutral color, and one in a bad color as much as $2,000 less. So there is a potential swing of as much as $4,000. So I’d say that’s pretty important. The same principal would apply to a $10,000 ’02 Cadillac DTS. Good color, as much as $500 positive, bad color as much as $500 negative, a potential swing of as much as $1,000. Fewer and fewer vehicles seem to have bad colors these days. Manufacturer’s remarketing departments must have gotten the message across to whoever picks out some of those color combinations that make you wonder.