Drive Virtually Free: Smart Used Car Buying Advice

I realize I’m over a decade behind the times with this, but a friend recently recommended I read The Millionaire Next Door.  For those of you who don’t know anything about the book, it is an analysis of the habits of millionaires.  While my goal in life is not to save every penny so that I can die with millions in the bank, I do believe in saving on the big things, like cars – which is why I created this website.

Authors Stanley and Danko break their millionaires into four types of car buyers:

• Type 1: New Vehicle-Prone Dealer Loyalists (28.6 percent)
• Type 2: New Vehicle-Prone Dealer Shoppers (34.8 percent)
• Type 3: Used Vehicle-Prone Dealer Loyalists (17.1 percent)
• Type 4: Used Vehicle-Prone Shoppers (19.5 percent)

So, we can see that 63.4% buy new and 36.6% buy used.  To me, that seemed a bit off, since the theme of the book is that millionaires become as wealthy as they are by not wasting money, and buying new is not the cheapest way to buy a car.

The authors note that many of the millionaires who bought new cars and were loyal to certain dealers (type 1) did so for networking reasons – many millionaires are self-employed and believe in reciprocity to keep their business going.

Those in the second group, who shop dealers for new cars, did so to get a better price and because they seemingly enjoyed the negotiation and shopping process.

Those in the third group, who bought their used cars from the same dealers every time, did so because they had similar motivations to maintain reciprocity with their clients (this group contains the highest percentage of entrepreneurs) while also saving money by buying used.

The fourth group, used car buyers who are only looking for the best deal, are considered the “most aggressive bargain hunters” of those surveyed.  Their views on car buying would align with those I have written about most, since this is how I shop for cars.  This group is considered the most frugal of all, across all measures of frugality – not just car buying.  They know how to find a deal and are “in a semi-searching/buying state all the time.”

The authors mention that the fourth group is something special:

Of all the types studied, used vehicle-prone shopers are the most illuminating for those interested in studying the path to affluence.  Why?  Because of all the groups studied, its members have the highest ratio of net worth dollars for each dollar of income: For every one dollar used vehicle-prone shoppers realize in income, they have $17.2 of net worth.  They have the lowest average income of all the groups, yet, on average, they have been able to accumulate more than $3 million.

So, even though more than half of the millionaires in this study chose to buy new, I think the key takeaway is that a large percentage of the group still chose to buy used – and they’re millionaires! Also, those who bought new or from a dealer were aggressive in getting the price down either through using their business as leverage or by shopping across several dealers and making them compete.

What about vehicle purchasers in general?  Most vehicle buyers are not wealthy.  Thus, one might logically expect them to spend more time shopping for the best deal.  Our research shows the opposite.  Those who are not wealthy are less likely to shop, haggle and negotiate than those who are millionaires.  Car-buying behavior does indeed help explain why some people are wealthy while most are not and never will be.

So, there you go.  Even millionaires – especially millionaires – are aggressive about reducing the price of their cars.  Those with the lowest incomes in the survey became wealthy in part by buying used, negotiating and letting others take the depreciation hit over the first few years.

Selling your car privately can be a hassle, but it is definitely worth the thousands of dollars you will save versus trading your car in or selling it to a used car lot.  Car dealers are experienced with negotiation and know how to get your car for as little money as possible so that they can increase their profits when they resell the car.

So, in order to sell your car privately, you’ll need to create an ad for it.  Your advertisement is like a resume – it just gets you an interview with prospective buyers.  Make it as engaging as possible to set your car apart so that you can attract multiple buyers.

Where should I advertise?

• AutoTrader
• Craigslist
• cars.com
• eBay Motors
• Local newspapers

How do I prepare my car for sale?

This is a critical component of selling which is overlooked by a surprising number of sellers.  To prepare your car for sale so that you can sell it more quickly and for a higher price, you should:

• Restore the car to factory condition as much as possible. Most people won’t want the same modifications as you – they are just looking for a car that is the same as the one from the factory.  If there are any small problems like scratched trim pieces which can be replaced.  You should also look at getting the car aligned and making sure that the tires are in good shape and are a matched set.
• Clean the car up! So many people show their car without washing it, with trash in the back seat and so on.  Remove everything from the car that you don’t need on a day-to-day basis.  Take a few hours to wash, wax and detail the car inside and out or pay someone to do it for you.  Put yourself in the buyer’s shoes – what would you think if you went to look at a car that wasn’t even kept clean?  You could be losing the sale or at least hundreds of dollars by not doing this.

What should my asking price be?

Look at Kelley Blue Book, Edmunds True Market Value and National Automobile Dealers Association (NADA) guides to estimate the value of your car.  Kelley Blue Book tends to value cars higher than what they are actually worth, in my experience.

Also look at the ads of other similar cars in your area to get an idea of pricing.  Call some of the sellers and ask if they have sold their cars.  If they have sold them, ask what the final price was – don’t be shy.  If they haven’t sold them and they say that they’ve been on the market for a while, you know that their asking price is not competitive (or something is wrong with their car).  Print out these ads as well as the price estimates from the above sites for reference when people come to see the car so that you can show that you’ve done your research.

I like to price my car in the lowest third of similar cars (cars of the same make, model, and similar mileage and year, within the same generation).  So, if there are 10 similar cars, I will price mine to compete with the 1st, 2nd and 3rd cheapest.  This will move your car more quickly and also put you in a position to invite multiple buyers to get them to compete and perhaps start a bidding war.

How do I make the car look good in pictures?

Take pictures of the car just after it has been cleaned.  Find a suitable location for the photos, like a secluded mountain road.  In front of your house is fine as well, but just make sure that there is no clutter in the background.  The time of day will affect the lighting, and while I’m not an expert photographer, I find that pictures come out best at the beginning or the end of the day when the sunlight is not too harsh.

It’s important to take lots of pictures to make sure that the buyers don’t feel as though you are hiding anything.  To cover the entire car, I will typically take the following nine photos:

1. Front driver side 3/4 view
2. Front view, head on
3. Front passenger side 3/4 view
4. Rear passenger side 3/4 view
5. Rear view, head on
6. Rear driver side 3/4 view
7. Driver door open, with a view into the car
8. In the car, with a view of the entire dashboard
9. A photo of the instrument cluster, showing the mileage

Also take photos of anything else ahead of time that buyers will be interested in seeing, such as modifications you’ve chosen not to remove or damage to the car.

Good photos will set your ad apart from the rest, since so many people fall flat here, posting up poor quality and/or not enough photos.

What should I write in the ad?

You will be limited in the amount of space you have to write your ad, but try to focus on what makes your car stand out among other similar cars in the area.  Stress the strengths that your car might have, such as:

• Desirable, premium features such as a sport package, navigation or upgraded leather
• Premium wheels
• Low mileage
• First owner
• Kept in a garage
• Highway mileage
• Full maintenance history
• No dings or scratches
• No accidents
• Clean title
• Major scheduled service completed
• Remaining factory warranty or extended warranty
• No modifications (if this car is a favorite of tuners, this can differentiate your car)

Many people are put off from buying a used car because they are afraid that they will be unreliable and that they will be buying someone else’s problem vehicle.  Service contracts provide some peace of mind that if something does go wrong, you will be covered.

Just one point of clarification – strictly speaking, warranties are included in the original purchase price of an item, whereas service contracts cover problems with an item after the original warranty has expired.  In essence, they are doing the same thing, but as we will see, the coverage is not always the same.

By buying a service contract, you are essentially making a bet that the repairs on your car over the period that you own it will cost more than you will end up paying for the service contract.  The chances are that you will lose that bet, but you might hit the jackpot, just like gambling in a Vegas casino (except your odds are probably better in Vegas).

Don’t believe all the ads you see from those selling service contracts which try to scare you with the potential cost of repairs.  Consider that independent mechanics will often provide parts and labor at half the cost of the dealer or less – that is not an exaggeration.  Finding an honest, knowledgeable independent mechanic can be difficult, but it is well worth the effort.

An alternative method for covering out-of-warranty repairs is to make regular contributions to a high-yield savings account on a regular basis, for the exclusive purpose of paying for repairs.  This requires discipline and you are still making a bit of a gamble that nothing catastrophic will happen, but you’ll be glad you prepared in advance if your car ever needs repairs outside of warranty coverage (by automating your savings accounts, less discipline is required).

Personally, I have never purchased a service contract and so far it has been the right decision for me, despite always having exclusively owned used cars – only one of which had a few months left on the warranty.  Maybe I have been lucky, but I think that putting in the effort of checking out the cars thoroughly before purchasing them and researching the model’s reliability ahead of time has played a large part in my good fortune.  The last 2 cars I have purchased (newer BMWs) were inspected by professional mechanics, because the potential repair bills are higher.

Purchasing a Certified Pre-Owned vehicle is another option, though you will of course be paying a premium for this – less so if you are buying a CPO car from a private party (2nd owner or more).  Here is Edmunds’ comparison of buying a CPO vehicle versus getting a service contract for a used car.

If you do decide to purchase a service contract, be sure to do the following:

• Read the fine print. Service contracts, especially those provided by third parties, can be very limiting in what is actually covered.  Read and understand what you are getting before you buy – you don’t want to get surprised and find out that your car is only covered for the drivetrain when your moonroof gets stuck in the open position.
• Check out the provider. Service contract providers have gotten a bad rap – many of them for good reason.  For example, US Fidelis currently has a Better Business Bureau rating of F.  You’ve probably seen their ads on TV, which are pretty suspect in and of themselves.  Not all providers are bad, but enough of them are that you should check them out before sending them a check.
• Go direct. If you are buying from a car dealer for whatever reason, don’t let them sell you a service contract that goes through a third party.  They will be making a profit off of the contract, so you’re better off cutting them out of the equation and getting a deal with the provider directly.

If you decide to skip the service contract, make sure you follow these steps prior to purchasing:

• Research the model’s overall reliability using JD Power Dependability Ratings, Consumer Reports’ Guide to Car Reliability, True Delta and Edmunds’ True Cost to Own tool (this will estimate repair costs for you)
• Search for only low-mileage cars (7,500 miles per year if possible).
• See if you can find a Certified Pre-Owned car for a similar price, or one with a remaining warranty from the original purchase.
• Get a vehicle history report and look at the maintenance history with the dealership if possible.
• Ask the seller questions about every aspect of the car to get an idea of how well it has been cared for.
• Get a pre-purchase inspection by a professional mechanic of your choosing, not the seller’s.

For more information on service contracts, see the following links:

BBB – Know the Facts About Auto Service Contracts

FTC – Auto Service Contracts

This week, a friend of mine mentioned that he knew someone who had just picked up a new Porsche 911.  He said that he had leased it, and gotten a great deal – only $750 per month.  He has an allowance of $700 per month for his car as a benefit of his job, so he said that “it’s only  $50 out of pocket per month.”  That number seems very low, so since he leased new I’m going to assume he put a huge amount of money down.

I hear this all the time.  People claim that leasing is a cheaper way to drive newer cars every few years without worrying about the depreciation.  Do they think that car dealers are stupid enough to give away money by taking a car back for less than it’s worth without making them pay for it?

Let’s do a comparison of three scenarios: buying new, leasing new and buying slightly used (1 year old).  We’ll use the BMW 335 convertible as an example.

As you can see, the lease is not any cheaper because even though you have smaller monthly payments, you don’t actually own the car at the end of the lease and thus you cannot sell it. I assumed that the cars were identical, driven 12,000 miles per year, with a 5% annual interest rate. The depreciation data came from Edmunds’ True Cost to Own tool, and I assumed that there were no operating or repair costs since the car comes with a 4 year, 50,000 mile warranty and maintenance plan which is fully transferable. The lease is a special promotion going on right now, and is actually limited to 10,000 miles per year, but I decided to at least give leasing a fighting chance.

It may be true that a lease will insulate you somewhat against unforeseen depreciation, such as a gas-guzzling Cadillac Escalade with a lease ending in 2008, amid record high gas prices and a recession, both of which severely reduced the demand for big trucks and thus caused abnormally high depreciation. However, these cases are rare and, while I haven’t run the numbers, I would wager that it still would have been much cheaper to buy a slightly used car.

No matter how you slice it, car dealerships know how to make money and they wouldn’t push the lease option unless it were making them as much or more money. According to BMW, more than half of their customers choose to lease. Just as you should negotiate over total cost instead of monthly payments, you should look at the total cost of a lease rather than just the monthly payments relative to a purchase.

Now that we know that leasing is just about as expensive as buying new, if not more, keep in mind that there are all kinds of restrictions on a lease as well – they can ding you for going over your annual mileage, and anything they deem is “excess wear and tear.” If you decide you don’t like the car, you are often out of luck with a lease as well – you are committed to paying for the full lease, even if you change your mind after a month or so. (For more information on lease contracts, see the Lease Guide website).

No, thanks. I’d rather own the car and be able to do what I want with it.

To get more in-depth information on how to save thousands while driving newer cars, check out my e-book here.

When you’re trying to find the right car on the used market, searching only in a radius of a hundred miles or so might mean that you will be looking for a while before you find the car you really want. By searching across the country, you will improve your chances of finding the right car and getting a good value.

For instance, if you live in an area where everyone drives trucks but you are looking for a sports car, your selection is going to be pretty small. The same goes if you are in an area which is not densely populated.  If you are in an area which is densely populated, you can get a deal by looking at cars which are in remote areas where there is low demand.

Many of my friends and co-workers thought I was a little crazy when I said I was going to fly from Los Angeles to Ft. Worth, TX to buy a car, but it ended up being a great purchase. Since then, several friends have done the same with impressive results.

Here’s how I did it:

• I searched AutoTrader and Craigslist daily. To get a great value, you need to be the first or one of the first to call about a car.  You can set up an automated search on AutoTrader which will e-mail you new results daily, so you don’t have to spend much time at all on the search.
• I ran a CARFAX on the car. I saw that the price of the car was a few thousand dollars cheaper than comparable cars in the area, and had only 35,000 miles.  Once I saw this, I wanted to make sure it didn’t have a salvage, junk or rebuilt title.  Everything checked out, so I called the seller.
• I asked the seller a ton of questions over the phone. The seller was very open and forthcoming about the car over the phone.  I had prepared a list of dozens of questions at the outset of my car search, and had this document open on my computer when I called so that I could record his responses and take notes.  I got the feeling that he was very picky about his car, just as I am.  It seemed to be in almost perfect condition based on his responses.
• I found the best local BMW shop and arranged a pre-purchase inspection. The seller seemed like a great guy, but I couldn’t just take his word for it.  So, I went on a car forum which I frequent to ask the members in the D/FW area what the best shop was to get a pre-purchase inspection (PPI) done.  I called the shop to see if they offered a PPI service and to find out the price.  They quoted around $180.
• I went over the inspection report with the shop. I called the seller and set up a time that he could take the car in for an inspection.  I made the appointment with the BMW shop and made sure that they would fax me the report first and give me a call to walk through any problems.  It’s important to note that I found the shop myself and made sure that they understood that they were working for me, not the seller.  Otherwise, a dishonest seller could get a friend of his at a local shop to give the car a falsified clean bill of health.
• I offered to make a non-refundable deposit with the seller. I knew that the car was in high demand and the seller confirmed this when he told me later that I was the first of many out-of-state callers.  I offered to send him a few hundred dollars as a nonrefundable deposit just so that he would hold the car for me.  He kindly refused, and said that he would hold the car for me.  That made me a bit uneasy, but it worked out in the end.  Without a deposit, he had no reason to hold the car for me other than the fact that he was a nice guy and I was the first to call him.
• I scheduled my flight.  With limited time remaining, I scheduled a flight to Dallas using frequent flyer miles for myself and a friend.  Not everyone has the luxury of having frequent flyer miles, but if you don’t, this strategy is still workable if it’s the right car at the right price.  I set up my hotel stays with points as well, but I was staying in relatively cheap hotels as well.
• I headed out early. To make sure we were rested, my friend and I left work a little bit early on Friday and caught our flight to Dallas.  Flying in on the same day would have just been more hectic since there was a long drive home.
• I checked out the car.  The next morning, the seller picked us up at our hotel and I got a chance to thoroughly check the car out myself.  There were no surprises and the car was exactly as had been described in the PPI report, so we headed to his bank.
• I handed over my cashier’s check. I had drawn a cashier’s check prior to leaving home.  We went to the bank, where the title was being held (I made sure that he double and triple checked that they would have it ready to be transferred before I left).  We filled out a bill of sale, triple checking the information on it.
• I made copies of everything. I made copies of his driver’s license, the bill of sale, and any documents from the bank.  I wanted to be 100% sure that in the off chance that I was getting scammed after going through all these steps, I would have some sort of legal recourse.

After that, I was the proud new owner of a BMW M3!  My friend and I stopped at a local grocery store for some supplies and then began our mini road trip, returning on Sunday morning.

I took a similar trip from Seattle to Los Angeles along PCH when a friend bought a Porsche Cayman S using the same strategy.  Both cars have turned out to be excellent purchases.

It’s not for everyone, but there are cases where purchasing cars from across the country can pay off.  There are risks of course – the car could end up not being what the seller or mechanic described and you would end up having to come home empty-handed, and the seller could end up being a scam artist.  You also lose much of your negotiating leverage once you have left home.

To minimize these risks, learn as much about the car ahead of time as you can, before making a commitment.  Use vehicle history reports, pre-purchase inspections and phone calls with the seller to minimize the risk as much as possible.  In some cases, you might be able to have a friend or family member in the area check out the car as well.

If you don’t have frequent flyer miles and hotel points, here is a projection of what the costs might be:

• One-way airfare: $200
• Two night hotel stay : $200
• Airport parking (two days): $40
• Fuel cost (61 gallons at $3.00/gal): $183

Total cost: $623

I’m not a travel expert, so I’m sure there are ways to reduce those costs further, but you get the picture.  If the car is rare and/or undervalued or you are in a rush, this approach can work well for you.  Plus, you get a driving adventure out of it!

Like most people, I hate when someone wastes my time. If you’ve ever sold anything through classifieds, you know the frustration of dealing with buyers who aren’t serious.

There are definitely more ways to identify people who are just looking rather than who want to buy, but in general, my experience has been that you shouldn’t waste your time with anyone who falls into the following categories:

• Someone who hasn’t already seen an example of the same car already (or one that is similar). Usually, people do not buy the first car that they look at, and these folks are still in the beginning phases of shopping.  They won’t have any reference point against which to evaluate your car and in my experience, are never ready to buy.  You may get the primacy part of the primacy-recency effect, but it seems that usually the convenience of buying the car you’re already looking at leads people to buy cars near the end of the shopping cycle.
• Someone who is undecided between different makes and/or models of cars. These folks are in a similar category as the ones who haven’t seen a similar car to yours already.  If someone is still deciding on what kind of car they want, don’t bother showing them your car, because more than likely they will come over, drive it and then tell you that they need to go look at another model before making any decisions.
• Someone who wants to buy sight-unseen. Not only do you have to be especially wary of scams with these individuals, but usually if someone claims they are ready to buy from out of state without seeing the car, they’re just poking around and trying to see what kind of deal they can get.  I have bought cars from out of state, but the difference is that I’ve always wanted to test drive them first.
• Someone who wants to negotiate over the phone, never having seen the car. These people seem to just be asking the same question to 100 different buyers, trying to use the shotgun approach to finding the lowest price.  They usually ask something like, “What’s the lowest price you’ll take?”  Without having seen the car or even having asked any other questions, they don’t know anything about its quality relative to other cars, so if you are priced competitively you can be pretty sure that these folks are just going to waste your time.
• Someone who is generally not knowledgeable about the car. My favorite question was from a friend who was selling his BMW M3, which is on par with a Porsche 911 in straight line acceleration – he said someone asked him, “Is it fast?”  If someone generally doesn’t know their stuff about your car, they are probably still in the beginning phases of shopping and will be using your time to learn about the car rather than actually evaluate whether it is the right car for them to take home that same day.

If you feel like you want to spend time with every prospective buyer, feel free to do so.  As with anything, there are exceptions to these guidelines and they aren’t hard and fast, so you may find buyers that I would have pegged as tire kickers early on.  My point is that you should try to focus on people who know what they want, have done their homework and are ready to buy because they are much more likely to take the car home and are less likely to waste your time.

If you have more suggestions, do feel free to share your experiences in the comments section.