So how is a 3 year old car determined to have been depreciated 41%? I mean, what are all the variables that determine the initial value of a car and the value it retains after 3 years?

We'll assume the car is in excellent condition and has never been in an accident.

I know there are a lot of variables, but it is determined so there has to be a formula or formulas to do this. It can't be just throwing prices at a wall and seeing what sticks...

Is there some established business science to this? Or is this "wholesale" based art???

 

In my ever so humble opinion, there is absolutely no science here. It is purely based on the irrationality of the human mind, and the general lack of common sense in society. There is no reason a car should be worth up to 50% less the moment you title it in your name, let alone drive it off the lot. This topic strikes a special chord in my heart... as I had to sell a new car I bought less then a year old. I had to take a $30,000 loss for no good reason other that "it was used".

 

Think about it from a buyer's perspective. Are you going to buy a 1 year old used car for a 10% discount off of a new car price? Probably in that one year, 10% of the car's life is already expended.

Then there is the tricky issue of financing. It is often harder to finance a car with a private party sale. Also, interest rates for used cars is different (higher) than interest rates for new cars.

And then there is the issue of it being brand spanking new--a clean sheet of paper!

I'd probably just fork up the extra 10% and get a new one, with the full length of the factory warranty.

 

This link might help explain the process.

Residual Values Help Determine Used Car Prices

 

Quote from the link:
"...here is an explanation from ALG on how it sets residual values. "ALG has developed state-of-the-art forecasting methodology and cultivated a technical staff with extensive backgrounds in economics and analytics. The ALG staff gathers industry data from a wide variety of sources, including manufacturers and vehicle auctions, and inspects and test-drives every vehicle. They consider all the technical aspects of a vehicle, along with a careful study of each vehicle segment's competition, sales strategy and resale performance, to derive residual values." ALG provides broad guidelines on resale values."

Sounds like BS to me...I'd like to see their "forecasting methodology". That is still just their SWAG at price/residual value...

 

I'm guessing their forecasting methodology has to do with supply and demand...

 

Easy way to figure is similar to what they are saying. It has to be done per model. Take a 2010 car for example. Look at kbb.com trade-in value vs. what the car cost new. Figure the depreciation percentage and use that against a 2013 model.

Actually, a friend just got a lease deal on a 2014 BMW 750ix. The car is 120k new. 2010's are selling for around 40K. That's 80K in depreciation over 3 years. His lease is 0 down, $1575 for 36 months. His total payments are $56K; that leaves about $24K that someone has to eat... Oh well.

 

+1. Majority of economics is psychology.

 

used car prices are determined by how much people are willing to pay to purchase the vehicle in question. Same as everything else.

residual values are something completely different.

 

If it's a 3 year lease, a comparable 750ix would have to be a 2011 model at this point. That may account for the large $24k discrepancy!

 

How much would you pay for a roll of open box toilet paper?

That's what I thought!

 

Ya, you may be right as he gets the car in October and was thinking months instead of model year months... Either way, it's all him. Would not lease that car for 1K, does nothing for me. New Range Rover, Maserati Ghibli, or XJ are much nicer cars IMO.

There's an a** for every seat.

 

Apples to oranges. When I rub my naked behind all over the seats in my Jag, it is still drivable. The odor goes away after the top is down for a few hours...

 

I hope the seats aren't ivory-colored.

 

Not any more...

 

I completely agree with your reasoning. But I wish you would not hold back in expressing your IMHO and just say what you really think.

Good write up.

 

True enough in the purest, "at-the-end-of-the-day" sense, but in the overwhelming number of cases a pricing guide....KBB, NADA, whatever....is used as a guideline to establish pricing.

So, what a person is "willing to pay" for a used car (or willing to sell one for) is largely based on what someone else (the pricing guide publishers) has told them they should be paying or asking.

Cheers
DD

 

This is true, but without the guides, how would anyone know how much to pay for anything?

Seems to me that the OP and others might be suggesting that the values assigned by these guides are somehow unfair, and that left to their own devices, buyers would be paying upwards of 80% of the original retail price for a 3 year old luxury car. Maybe if there were a super strong economy and an extreme shortage of luxury cars...

 

They wouldn't.

And then we'd have a true example of "....whatever a person is willing to pay".

As it stands most people are only "willing to pay" what a little book that fits into your shirt pockets tells them they should be willing to pay



Cheers
DD

 

I wonder how much people would be willing to pay for any car, if they just removed MSRP's altogether.

Maybe eBay is a good method of finding out what people are willing to pay--many cars do not even get close to their fair market value prices (and therefore don't meet reserve and don't get sold).