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Understanding Car Depreciation-dont just buy a car

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Understanding Car Depreciation-dont just buy a car
« on: May 27, 2015, 07:13:21 AM »

The automotive industry is highly misunderstood and that is partly the fault of media and dealers, but also because of the lack of education on how it all works. Most people don’t seem to understand how the used vehicle market works and seem to miss that it actually makes up a very large percent of all car sales worldwide.

The used market has and will always be the only way I buy a car, and while many seem to have this misunderstanding of what a used car is and how one should be purchased, I decided to focus this article on educating people on how the market works and why buying new makes no sense at all, even if you want a lease to write off.

All of this knowledge of course comes from my course called Exotic Car Secrets, where I teach people the inner workings of the automotive industry and how to leverage it to never pay for a car again.

What is a used car?
Simply put, it’s a car that has been registered and owned by someone as its primary owner before you take ownership of it. In most cases, that person has used, driven and enjoyed the car, and chose to get rid of it by either upgrading, downgrading or getting something more fitting to their needs.

It does not automatically mean the car was abused or mistreated, or that the car was known to be full of issues. Someone could have kept the car ten month, two years, or ten years, but at some point most people let go of their car and venture into another. Used cars are not necessarily old and, as a matter of fact, there are almost always new cars selling used on the market — even the same year the new ones come out. Of course, as time progresses, more and more cars become available on the market driving the pricing down.

Sometimes, as in the exotic car world, new cars have waiting lists and cannot even be built fast enough to keep up with the high demand. In such cases, the used car market becomes flooded with opportunists who were able to buy the car — because they were on the list or have a strong enough connection to a dealer — and then flip it for a profit.

With wait times stretching into the years for certain models, those who don’t wish to wait are often willing to pay a hefty premium. What I am trying to make you understand is that the dynamics of the used car market have changed a lot and cannot be compared to what they were even ten years ago.

So how does pricing work in the used car market?
There are a few things you should know that are imperative to understanding the market and how it all functions, especially as pricing is the key reason dealers survive or perish when playing in this field. Once a car leaves the lot, it is now a used car and unless the car is unavailable or unattainable new, it will already be worth less than it was new.

By simply being considered used, it will lose approximately 20% of its value — all without even one mile being added on the odometer. Next we’ll cover how the new car you just bought will continue to depreciate — no matter what you do — and why that happens.

Dealer Rebates: When new models come out that are identical or slightly improved than the previous model, dealers offer incentives on the older models still left behind.

Here is an example: You buy a Mercedes CLS550 for $75,000 and at the time you buy it, it is fresh and everyone wants it. You pay $75,000 for a 2014 but later in the year a few models in inventory are left on the lot while the dealer has already received the 2015 models. In order to get rid of inventory that is depreciating, the dealer offers incentives backed by the manufacturer, such as 0% financing or cash rebates as high as $20,000.

Now someone else can walk in and buy the CLS550 you bought for $75,000 for $55,000, meaning that your car, brand new, is now worth that — so imagine what your one-year-old car is worth? Roughly 20% under that, assuming you haven’t put on too many miles. In a matter of one year, you have lost almost 40% of the value of your car, and the mileage you have put on it (whether average or low average) will not matter much.

Lease Returns: While many people believe luxury and exotic cars are all cash cars, that is also not true. Most cars are leased, meaning after 24 and 36 months dealers nationwide are flooded with cars of the same model year, saturating the market. This creates a buyer’s market: choices for used cars increase and demand decreases.

A consumer who wants a particular car that is 36 months old will have plenty of choices on the market to choose from and can negotiate pricing as other dealers will have similar choices available at cheaper prices. Good for me but awful for the guy who bought that same CLS new for $75,000 only to find that after three years it’s only worth $30,000. This is the second MAJOR drop a new car goes through.

Warranty Expiration: The last major drop a new car goes through is when the original 3yr/36k miles or the 4yr/50K miles warranty expires. Many people would never buy a luxury car that can costs thousands to fix out of warranty, as people are creatures of habit and comfort and like to know how they will budget for their cars monthly.

Because they don’t, the demand for such cars drops even further, making the price plummet one last time. In most cases, you can find a great independent mechanic using our system at Exotic Car Secrets and never worry about high dollar repairs. The key is to know how to find one, which we break down.

The Banks: The final but smaller drop that occurs is at the five-year mark on a new car, because at this point banks no longer like the car and no longer want to assist in financing it. The risk is greater, the warranty is expired, and the car is now completely depreciated — and they don’t like that. They make people’s payments not look as attractive, which makes most of the cars over five or six years of age attractive to cash buyers but not normal consumers. And most people are NOT cash buyers.

Now that you understand how a “new” car becomes “used,” and what drives the car down in price, try to understand how much money you could save if you actually bought the car right after the lease return with low miles, some warranty left for peace of mind, and in immaculate condition?

How about 60% off the price, for just waiting two years? By then the car is still in its current design/generation and still very much a gem to look at, but your wallet didn’t lose a gem to acquire it.

That said, there is the whole idea of getting the right car at the right price rather than just buying it at the price you are shown; most dealers mark up their cars by as much as 25%, as people are usually not aware of how the market works. Use our negotiations strategies at Exotic Car Secrets to save up to 80% on your next car, and get the car you want, not the one you believe you can afford.

Pejman Ghadimi is the author of the Third Circle Theory, a powerful book which explains how some of today's top visionaries are made. Since the age of 25, Pejman has been financially independent and has dedicated his time to bringing Secret Entourage & Secret Academy to life, a unique platform which focuses on helping motivate, educate, and improve the lives of young entrepreneurs worldwide.
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