The Expert Podcast

…One of the reasons that the used car market is been thrown out of whack for the last couple of years. Has had to do with auto leasing and you might say well what does auto leasing have to do with the used car market? Well here's what happens. When a new car dealer or even a used car dealer needs to get inventory for their car lot. There's no used car factory There's not a company that makes used cars right?

If you're a new Ford dealer and you need new Fords you call the factory and you say ship me a bunch of cars Ford F-150 Mustangs Whatever. If you need used cars, there's no factory you can call to say send me some used cars used cars Don't grow on trees. So where did they come from Well…

One source for a dealer is trade-ins And when somebody trades in their old car for a new car well now you have a used car you can use for your lot. Well, by definition that means. You're going to get less used cars than you sell new cars So if you're a dealer and you sell a hundred new cars a month at the very most you're going to get. 100 used cars to sell. However…

Most of those people I should say most but some of those people don't trade in a car They just buy a car without a trade in. So now maybe you have only 50 trade-ins while some of those trade-ins you don't want to sell on your lot There might be an old beat up car high miles, or maybe. A car that's nicer newer, but it's just not it doesn't fit your inventory If you're a Ford dealer and somebody trades in a Ferrari, you're not going to put it on your front line. Right. Even though something not quite that extreme maybe you're, if you're a Ford dealer and somebody has a high-end Acura or a low end Kia you might not put on your lot Cause it might not match your demographic People might not be coming to your Ford dealer to buy a base model Kia.

Right. So that might give you 20 or 30 trade ins a month that you can sell on your lot Well if you want to sell as many used cars as you do new cars, you're gonna need to fill that gap If you get 20 nice trade-ins or 30 nice trade-ins. You now need 70 more cars per month. To put on your lot where are you going to get them from Well, these cards come from auctions. They come from auctions.

And there are two main auctions there's Manheim which is one of the largest auction companies. And they have auctions almost every day. And the dealers can buy cars there. Where did the auctions get the cars from Well they come from two main sources. They come number one from.

Rental cars. So when Hertz enterprise Avis. Budget. Have a card that's rented. And they buy a new after two years or three years or certain number of miles, they bring them to the auction to sell dealers will be there buying up those cars.

But the other big source is off lease cars. It used to be that. A large percentage of new car purchases were done using a lease. So when you lease a car for two years or three years, At the end of that lease you bring in the keys drop them off at the dealership and you. And you take off.

Maybe you buy a new car either way When you drop off that lease turn in the dealer doesn't necessarily keep that car. Right. They may have an option too, but those cars also go to auction. Either way whether the dealer keeps it or it goes to auction. That lease turn-in is now extra used car inventory.

Now what's happening is people are not leasing cars as much as they used to. Right. People are either financing, buying them cash, buying them through credit union leasing isn't as popular We'll talk about why in a minute. But the fact that these leased vehicles are not coming back into the marketplace is putting a big reduction on used cars More importantly. They're the better quality used cars.

Think about it. If you have. Two cars One is an off lease where somebody was the owner They drove it every day They took care of it. They had free maintenance right Usually lease cars come with free service for the first two or three years. And then they're right next to it You have a rental car, which one's going to be in better.

Right. That rental car, whoever drove it. There might've been a thousand drivers of that car over the course of three years. Every one of those drivers they don't care about that car They drive there for two or three days and they just beat it up. They don't really care that much about maintenance They don't care about how they drive it driving it easily going up on curbs going over bumps.

they're not going to take care of it like an owner would and the Rent-A-Car company look all they need to do is make it last for two or three years and then give it back to the auction. So they're going to do basic maintenance but they're not going to go. Out of their way to do synthetic oil and extra oil changes and really good service They're just going to do the bare minimum. Because they don't want to spend the money because it's not really their car They're going to get rid of it. So these leased cars were the better quality cars.

They were the better inventory Another thing about leased cars is that they were also better equipped Meaning that, think about when you rent a car, it's usually a base model Doesn't have any extra options. it doesn't, it usually the colors are more basic A lot of rental cars white or silver or gray, where. People when they buy a car for their own use they want to make sure it's very customized It's a higher model, right It might be the luxury model with a sunroof and digital dash and everything else where the lease cars don't have the XM radio It doesn't have a sunroof It doesn't have nicer wheels They're more basic cars. So these off-lease cars were very very good inventory for dealers to have because they were more. Customized personal cars.

And that was a big deal when it came to resale. So now what does this mean for the used car market Well, dealers or use car.

marketers now don't have this same volume of inventory and the same quality of inventory. What that does is it pushes the prices up because normally these off rental cars which were more basic plain vanilla cars sold for mediocre average prices Well now those are the only game in town. So those are now selling for higher more marked up prices. The. off lease cars or the better quality cars when they come in, those sell for all the money in the world because they're very rare.

Right there there instead of 30 or 40% of the cars are now. One out of 10. Right there like diamond in the rough. So these awful these cars are incredibly valuable. What also made it more difficult is.

In the past it used to be when you got to the end of your lease. You would have what's called a lease buyout, right You didn't have to come in and drop off your keys. You could just buy out the rest of your lease So let's say for example, you had a lease buyout option of $20,000 and every lease has a fixed amount at the end of the lease that you can pay to keep your car. Well if you decided to do that buyout option you just paid that money and you kept your car well, in the past that number was a lot higher than what the car was actually worth because. Leasing companies used to artificially inflate these buyout options in order to reduce the payments to make it more appealing to lease a car.

Wow. when the used car market went crazy in 2020 and 21. A lot of these older leases. Had a buyout option of 20,000 Well now the car might be worth 25 or 26. So a lot of people who are at the end of their lease.

They decided to wait a minute I'm not just going to drop off my car I want to keep it. This car is worth 25 grand. I only have to pay 20 boom I'm writing the check and now they kept the car. This kept more vehicles out of the marketplace. And the fact that.

The car market is. New car market is more competitive now.

for buyers it's a sellers market. The leasing companies don't have to be as aggressive with their lease deals anymore They don't have to offer us as much incentivized leasing. So leasing is now going down in popularity, put all this together What it means is less new cars are being leased, which means less quality. desirable use cars are hitting the market. This is something that affects used car buyers and even affects new car buyers because a lot of high-end…quality used cars.

Displaced new car sale So somebody might go into a dealership to buy a new car and they say wait a minute here's a two year old to use car. off lease…20,000 miles. I'll buy that one instead and save some money. Now since that car doesn't exist you have to buy new If you want a very high quality car Cause. Off rental It's not going to be a good quality car.

This is really throwing the used car market even more in turmoil and making it tough for dealers to get good inventory.