How does a dealer determine that value for your trade? Why do you get such different numbers from different dealers? Understanding the difference between trade value and trade allowance is the key.
How trade value is determined
Trade values are ultimately determined by auctions. An auction is the bottom line for unloading a vehicle. If I put a used car on the lot that nobody buys, it ultimately will need to be sold at auction. Generally, we make less running a vehicle at the auction because there are transportation fees, run fees (the auction company charges you just to have the vehicle offered to buyers) and selling fees associated with the auction.
When a customer comes in with a trade the first thing I do is scan the vin, assess the condition and look to the auction sheets to see if something similar has run in our area lately. If so that gives me a pretty good idea of the value. Here is an example auction sheet for a 2015 Escape:
If I’m going to put the vehicle on my lot, I may bump the value by a few hundred dollars because I don’t have to pay the fees and transportation. Note that the trade value is the amount a dealer believes the vehicle will bring at the auction, less fees.
The difference between trade value and allowance
Trade allowance is the amount the dealer shows you for your vehicle based upon the deal being put together for the vehicle you are buying. An allowance takes into consideration the profit margin that the dealer has in the deal and dealers will often “over-allow” (show a higher number for your trade that it is actually worth) because people don’t like seeing how low trade values actually are. Below are valuations on the 2015 Escape from NADA and KBB. It is hard to tell what the vehicle is really worth.
NADA values range from $15,675 – $18,075 whereas KBB ranges from $13,721 – $15,114 for the same vehicle.
Know the type of dealership you are dealing with
At Dovi Motors we generally mitigate the risk of losing money on trade-ins by having them sold ahead of time. We build relationships with wholesalers who will purchase vehicles from us based on a description over the phone. At Dovi Motors we rarely give an allowance that is different from the value because we already have the trade sold when we give a price. Other low price dealers will often try to “steal the trade”. They don’t negotiate on price but they start with a very low trade in allowance and a savvy customer can negotiate up the trade. At Dovi Motors we sometimes negotiate the trade value if we decide to put the trade on our used car lot, but it has to be the right used car, one which we feel confident can sell at a profit.
Higher price dealers will always show larger trade allowances not values. They generally work their deal off MSRP and they may allow thousands more for a trade than low priced dealers. You as a consumer just need to realize that they are giving you an “allowance” not a “value”. They will never sell the vehicle at auction for that amount, but they can show you that number because they have a large profit margin they are working with. Take this deal as an example:
|Lower Priced Dealers||Higher Priced Dealers|
The evolution of dealers taking trades
Back in the 1950s when my grandpa started Dovi Motors, car shopping was much different than it is today. At that time customers visited six or more dealerships before making a purchase, you were lucky if you could get anywhere near 100,000 miles on a vehicle, and the profit margins on selling new cars were high. There was no Internet, no KBB.com and wholesale information came at most weekly in the form of a pamphlet mailed by the local auctions. At that time, if you wanted to trade your vehicle the dealership always gave you a trade allowance. The dealer would set the trade value later based on a number of factors including how much recondition was required, how long the vehicle would need to be held, and how much profit they wanted to show on the deal. If the salesman had $3000 of profit on the new vehicle he was selling he could “allow” and extra $1000 above what he believed the trade was actually worth and still have a $2000 profit on the deal. Once the dealer got the used vehicle and put it though their shop or sold it to a wholesaler they could adjust the “trade value” to show $2500 of profit if they wanted.
Today this has all changed because it is rare that a dealer sells a vehicle with $3000 profit margin. In the new car business it is common for a dealer to make between $300 and $800 on the vehicle sale. Today dealers have to be very careful to set an accurate trade value, because missing by $500 can be the difference between making a profit and suffering a loss!
What should you do with your trade?
In the end, your current vehicle is worth what someone is willing to pay for it. I always encourage my customers to try and sell their vehicle outright if they are unhappy with my trade values. If you are going to shop between multiple dealers make sure that you are looking at the same new vehicle, and be sure that they itemize the quote with MSRP, Discounts, Rebates, and Trade Allowance to get a bottom line before taxes and financing. This will give you an apples-to-apple comparison so that you can see who is giving you the better deal. Also remember that there is more to buying and owning a vehicle than the bottom line price. You want to build a relationship with your dealer or salesperson. Having a good relationship with your salesperson will give you confidence that you are making a good purchase and it will help take the difficulty out of the buying process. Would you like to get a trade value for your car or truck?
Have questions or comments about trades? Let me know in the comments below!
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