
How we misprice used cars - ryan_j_naughton
http://priceonomics.com/how-we-misprice-used-cars/
======
mistercow
In Robert Cialdini's _Influence_ , he describes a scheme his brother used to
pay his way through college. Basically, he'd buy a car at the bottom of its
fair blue book range, clean it up, and then place an ad for it at the top of
its price range, with a well-worded ad, asking people to call for an
appointment. The sneaky bit is that he'd then schedule all of the interested
buyers for exactly the same time. They'd arrive minutes apart, but he'd only
let them look at it on a first-come-first-serve basis, making the late-comers
stand and wait. The pressure created by the competitive atmosphere would
always ensure a sale.

If you combine this with the information in this article, you could
potentially never pay for a car (or even major maintenance) again, and even
make a profit in the long term.

1: Find a popular and reliable model of car that doesn't require any standard
maintenance in the 25k-45k mile range other than oil changes.

2: Write some generic ad copy for this car. Make sure to research this and
make sure you're advertising as effectively as possible.

4: Buy this car used, but in good condition, near the bottom of its price
range and just over 30k miles.

5: When you hit 39k miles (if you're driving an average of 60 miles/day, this
will be about 5 months), sell it using the scheme above. You've already got
the ad copy; just tweak it to fit the specific car you have.

6: Goto 4.

~~~
eru
This scheme will probably work, and make you some money. In general, there's a
word for doing work for money, it's called a job.

~~~
mistercow
That's true, but for the average person, it would be worthwhile, even with
zero profit.

According to my cursory internet research, the average US household spends
1.5% of their annual income on car repairs[0]. The average adult works 1,300
hours per year[1]. The average household has 2.1 adults[2]. So in a five month
period, the average household puts about 17 hours into car maintenance.

So if you live in an average household, you'll come out on top with this
scheme as long as you spend less than 17 hours on the process each time.

[0] [http://auto.howstuffworks.com/under-the-hood/cost-of-car-
own...](http://auto.howstuffworks.com/under-the-hood/cost-of-car-
ownership/auto-maintenance-cost.htm)

[1] [http://www.zerohedge.com/news/2013-05-13/how-average-
america...](http://www.zerohedge.com/news/2013-05-13/how-average-american-
adult-spends-24-hours-each-day)

[2]
[http://www.popcouncil.us/pdfs/wp/144.pdf](http://www.popcouncil.us/pdfs/wp/144.pdf)

------
yetanotherphd
On maintenance intervals: If all cars really did get scheduled maintenance
done on time, then cars that have just over X0,000 miles should be worth
_more_ because they just had this expensive maintenance done.

That is a car with 51,000 miles will just have had its 50,000 mile maintenance
done while a car with 49,000 miles will not have.

So scheduled maintenance cannot explain these jumps, since it would predict
jumps in the opposite direction.

~~~
ghaff
The bias discussed in the original article is pretty well documented. It also
has nothing to do with the other inefficiencies in used car pricing that we've
been discussing here :-) Of course, there's also nothing automatic about
getting schedules maintenance done when the odometer rolls over to some
mileage that ends in 000.

~~~
yetanotherphd
I'm aware of the original articles point, my post was of the form "even when
you account for X, their analysis is still valid". And neither did I mean to
imply that people actually get maintenance done exactly on schedule.

A more relevant question would be how much dead weight loss this bias results
in. I'm guessing not that much.

------
rdl
Cars often have specific expensive maintenance at specific intervals. My car
is worth maybe $2k more if I HAVE completed the timing belt replacement at
115k than it was at 114k before completing it. Warranty expiration also might
influence value -- I'd far prefer a car with 1000 miles left on a
comprehensive warranty, to know I could deal with undisclosed issues, than
just expired from warranty.

~~~
ghaff
In general, there are just a lot of information asymmetries associated with
buying used cars that make it difficult for a seller whose high mileage car
has been well-maintained and is running well to get what is perhaps
objectively the "right" value for a car. In your example, you'd be crazy to do
your scheduled maintenance at 115K if you were planning on selling your car in
the near future. You'd never recoup that $2K you spent.

The reality is that this well-maintained car that doesn't have problems
(and/or which has cosmetic problems that you've learned to accept) is probably
going to be worth more to you than to a random buyer who just sees "high-
mileage car" (that they're only looking to buy because they need a car and
don't have much money).

Some of the information asymmetries can be mitigated by buying from a dealer
with an add-on warranty but then the prices are such that they often don't
look like a particularly good deal relative to a new car.

~~~
sokoloff
It would seem a pretty rare situation that a new car would be financially a
"good deal" compared to a used car at a dealer, regardless of warranty or
financing differences.

Most new cars are bought for psychological reasons, not financial reasons,
IMO. (Nothing wrong with that, as long as you aren't confused into thinking
you're "saving money" buying new.)

Need a "new" car and want to save money? Buy a late model (3-5 years old) car
with higher than average miles on it. It will be cheaper than the average used
car, because people are inordinately "afraid" of miles on cars. Late model, as
it will still "look kind of new" (so scratching that itch), will likely have
recent safety advances, and in areas of the country that salt the roads, it
will have fewer years of salt exposure than a similar miles at an average rate
used car. High miles in 3-5 years probably got a lot of highway use and surely
got a lot of regular use. Those miles aren't as hard on cars as the
"creampuff", low miles, sat in traffic for hours each day cars.

Once you've bought it, find a good independent mechanic for that brand (or a
general independent). Will be way cheaper than the dealership, and in my
experience, just as good. I do all my own maintenance (ex-tires and ex-
exhaust), but a good indy will save you a bunch of money as well.

My car ('98 Mercedes E300) just flipped over 210,000 miles on the way into
work today. It will be retired in 1-3 more years due to rust, not mechanical
malady. I paid about $6000 about 4.5 years ago, and I've got an additional
$650-ish worth of parts into it over the 4 years. Brakes will be good for the
duration, and if it lasts 3 more years, I'll need tires, but if I retire it
next year, it won't. That'll mean more than 5 years of service for $5000 in
depreciation and out-of-pocket maintenance expenses, as I'll be able to sell
it for $1500 or so running but rusty.

That's a little bit of an extreme case as I do all my own work, so the $650
number would be more than double that (glowplugs, brakes all around, and two
window regulators would be the labor needed), but I've driven a pretty decent-
looking, mid-sized diesel Mercedes for 4.5 years and over 30,000 miles for
under $100 per month in purchase and maintenance costs. I paid almost as much
in diesel as I paid for the car over its life. (I get just under 30 mpg, and
diesel is a hair under $4/gal.)

Buying the new equivalent of my car? $51,400 base MSRP.
[http://www.mbusa.com/mercedes/vehicles/model/class-E/model-E...](http://www.mbusa.com/mercedes/vehicles/model/class-E/model-E250BTC)

Drive that 4 years and 30,000 miles and it's likely worth $30K, or a per-month
cost of around $500/mo, five times as much. (Granted, that's for a brand-new
car, which has some appeal, even to me, but it's not worth 5x as much, IMO.)

~~~
mikeash
Well, much depends on exactly what sort of car you're buying and when you're
buying it, too.

I bought my first car in 2006. It was a GM product, about a year old, and with
about 12,000 miles on it. I paid just over _half_ of what it would have cost
to buy it new. That was a good deal.

I bought a new car this past summer from Toyota. I would have saved a couple
of thousand dollars going used, which just wasn't worth it to me compared to
getting something with a known provenance. The price difference wasn't very
big, in any case.

Between the brand (GMs depreciate like mad, Toyotas not so much) and the
economic climate (I get the impression that Cash for Clunkers took a lot of
used cars off the road, and demand for used cars is higher in a weaker economy
anyway), the difference between the two cases was massive.

~~~
rdl
I bought a Lincoln LS in Dubai, UAE for $22100 from the ford dealer with 300
miles on it in 2007 (2006 MY); it was $45k list price. There were 8 in country
and it had just been cancelled. Extra bonus is I found a $1k satellite phone
under the seat.

------
exue
It's also a matter of scheduled maintenance: If you buy a car right before a
bunch of critical components are replaced, expect a repair bill of $500-1K at
the appropriate time. Although a lot of cars at say 60,100 miles will probably
not have their 60K done - at which point you can use that as a bargaining
point. If it's a high-activity auction, it might be hard to get the exact
details on each car for sale

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ChuckMcM
I have found this can be pronounced in RVs as well. Totally trashed RV with <
10K miles selling for much more than a expertly maintained one with 50K miles.

~~~
mistercow
That's not the point. What the article is talking about only applies to the
difference between vehicles at the bottom of a 10k mile bracket, and vehicles
at the top of the same bracket. It's independent of maintenance, and doesn't
have anything to do with cars differing by 40k miles.

~~~
ChuckMcM
I would love the priceonomics guys to do the same survey on RVs. My experience
shopping for RVs is that RVs have a price co-efficient that is strongly
correlated with "mileage" and poorly correlated with "condition." This was
exactly their point on cars when a 79,900 mile car was $210 more expensive
than a 80,100 mile car. I read the article to say that people use mileage
rather than condition to price cars.

So far the closest I've seen on that topic is this entry
[http://blog.priceonomics.com/post/32944888191/living-in-a-
va...](http://blog.priceonomics.com/post/32944888191/living-in-a-van) which
talked about the Westfalia RVs.

