The Expert Podcast

The used car market is changing dramatically at the end of 2022 and the beginning of 2023. There's a lot more inventory, and quite frankly, book values are crashing. But for dealerships and even consumers, this creates an opportunity. According to this article from Auto Marketing, variable management is important, and many dealerships don't do this, which means consumers can take advantage of it.

What does that mean? First of all, there's distressed inventory. What is distressed inventory? It's when a dealership has a vehicle that's been on their lot for too long, usually 30 to 45 days. Sometimes the reason that inventory is aged is because there's something wrong with the vehicle. It might not necessarily be a mechanical problem, but it could be a problem with the market—maybe that vehicle is no longer in demand, maybe it's the wrong color, or maybe the equipment package isn't good. But there's something about that vehicle that makes it undesirable, and they call it a "left-handed vehicle." It's not really that popular, and people don't want it. When that happens, the vehicle becomes aged.

Certainly, a dealership can discount the vehicle more and more to get rid of it. Sometimes, the problem with distressed inventory is that it's overpriced. Maybe the dealer paid too much, but if it's a popular vehicle, you usually don't have to discount it too much because somebody will snap it up since it's a desirable vehicle that may be hard to find. The solution to distressed inventory is simple: discount it. You don't want it to sit on the lot for 45, 60, or 90 days because that will become a problem.

However, there's another problem: sometimes dealerships price profitable inventory too low. There are some desirable cars that dealerships don't recognize as very desirable and price them too low, partially because they're reacting to their distressed inventory. They might think, "Well, this car is 90 days old, and I can't sell it, so I better lower the price." But if the vehicle is a high-value investment for the dealership, it may have low market days of supply. Still, a lot of dealers consistently price these vehicles below what they should, and they sell very fast—sometimes super fast. Consumers often see these deals and snap them up quickly.

As a consumer, you can take advantage of this. If you're looking for a certain type of car, widen your range a little. For example, if you're looking for a Ford Explorer, you might find that an XL model is less desirable than an XLT, but the XLT could be priced the same as an XL. If you widen your scope and look at the market, you might find a dealership that accidentally prices an inventory item too low, and you can jump on it. But you won't know unless you watch the market for a while. Don't just jump on the first car and think, "Well, that's just how much these cars cost." Dealerships frequently price their cars improperly because they're not paying attention to the numbers. It's kind of like that movie Moneyball, where you have to know your numbers and data science for inventory.

You can avoid distressed inventory when you see that the price is too high and the car is not desirable. But there's a lot of valuable inventory that dealers have on their lot that they accidentally price below what they could get if they priced it higher. The author of this article is a company that helps dealers manage their inventory, and they recommend having patience with vehicles that offer the highest potential for ROI (Return on Investment). As a consumer, you can use that to your advantage. Some dealerships don't have the patience or make a pricing mistake. All it takes is one mistake on one vehicle—because you only need one vehicle, right? If a dealership has 100 cars on the lot and prices one car improperly, boom—you can jump on it.

But you have to keep your options open and have patience. If a dealership is going to make a mistake by not having patience, don't make the same mistake. Don't just jump on a car because you like the color. Wait a while and find the one that has the right combination of price, equipment, and color that you want. You might need to widen your range—even your geographical range. Instead of finding a car in your hometown, try searching within 50 to 100 miles. It only takes you a couple of hours to get there, and it could help you get the vehicle you want at a better price.

Deals are out there, and this information comes from an industry trade insider publication. If you're a dealer, you likely already know this, but if you're a consumer, remember: dealerships sometimes make mistakes with pricing, and if you're patient, you can find a good deal. If you're a dealer, make sure you're watching the markets and checking your inventory. You don’t want to have 90-day-old distressed inventory, but on the other hand, you also don't want to price something too low where you could have sold it for more and still attracted consumer interest.