The Auction Factor

The Auction Factor

It looked so forlorn, sitting up there on the cold, hard auction block with nary a second glance from the sparsely filled seats. You'd think a shiny red two-seater might cause more of a stir among buyers, but few bidders had shown up for this night of auctioning (something about an NBA final, if I remember correctly), and even fewer made a move as the auctioneer lowered his opening bid from $5,000 to $2,500.

When the opening bid dropped to $1,500, I simply couldn't stay silent any longer. Despite my intentions of going to this auction only as an observer, a combination of nostalgia and enthusiasm (undoubtedly spawned from driving a similar car, owned by my older brother, in my late teens) overwhelmed my better judgment, forcing my hand toward the heavens like those long-forgotten Sure antiperspirant commercials. I became immediately aware that extending my arm to full length was a waste of effort. The auctioneer's eagle eye had zeroed in on me the moment my hand left my lap; not that this was any great feat in a room almost totally devoid of stirrings.

"And I have fifteen hundred dollars!" the man with the microphone bellowed in a vain attempt to ignite the bidding audience. "Do I hear sixteen?!" was his follow-up, which, surprisingly stirred another bidder to action, sending his gaze to the other bidder and then immediately back in my direction. "I've got sixteen hundred dollars! Do I hear seventeen?!" he crooned, almost daring me not to bid.

I paused, trying to decide if I should continue bidding on a car that I needed about as much as I needed a higher mortgage payment. Something on my face, or maybe in my lack of motion, must have triggered the auctioneer's sensors. "I have seventeen hundred dollars! Do I hear eighteen?!" he continued while rotating back toward my bidding nemesis.

Inside my head I wasn't really sure what had just happened. "Did I up the bid?" I pondered. "Did someone else bid directly behind me?" At this point I wasn't sure if I was even in the running for the low-slung sports car anymore, and a big part of me breathed a sigh of relief.

"Seventeen!" the man with the puffing red face and black suit continued. "I've got seventeen. Do I hear eighteen? There's no reserve folks, so it's going to go home with somebody today! I'm asking eighteen. Do I hear eighteen? Going once. Going twice. SOLD! For seventeen hundred dollars!" he trumpeted while looking directly into my eyes.

Apparently, I had still been in the running for the car.

I convey the above story for several reasons, not the least of which is to warn potential "auctionees" that if you attend one of these events, make sure you are well versed in the fine art of not bidding. In this case, the proper response to an auctioneer who is looking to you for a "yay" or a "nay" is to keep your hands and feet absolutely still and to look down and away from the auctioneer. I obviously learned this a bit too late.

As it turned out, even $1,700 was a good deal on this particular vehicle, so no harm, no foul. And while I'd love to brag about scoring a creampuff Porsche 911 or Chevrolet Corvette for that kind of money, the vehicle in question was a 1973 Saab Sonett. To the 12 of you out there who just said, "Oh, yeah, one of those," I applaud the breadth of your automotive knowledge. To the rest of you, I'll simply state that the car is a quirky but fun vehicle (much like any Saab). After some minor repairs, I'm into the Sonett for about $3,000, and it's been my daily driver for several weeks. Not bad for the cost of a high-end mountain bike.

But are auctions only suited to freakish individuals looking for good deals on obscure Swedish sports cars? Many of you may think so, but the truth is that you can benefit from an auction without ever visiting one. See, most auctions are never attended by the car-buying public but are instead the feeding grounds of used car dealers looking to keep their lots full and their inventory fresh. These dealers hope to pick up relatively clean cars at a cheap price and then "flip" them as quickly as possible for a profit.

How does this benefit you? Well, if you understand where most used cars end up, you can tap that knowledge to cut a better deal on any vehicle you may currently be leasing. Let's use the long-term 2000 Lincoln LS as an example. Here's a car we paid $37,705 for back in November 1999. Since then we've driven it almost 40,000 miles and had numerous scheduled, as well as a few unscheduled, maintenance chores performed. Most of the unscheduled maintenance centered around the car's erratic transmission, which never seemed to get the hang of when and how to shift until it was replaced, under warranty, almost a year after the car was purchased. Since then it's been nearly flawless.

As we approach the end of our two-year lease on this car, we have to decide whether to turn it back in, keep it, or buy it and re-sell it. Residual value on the Lincoln (and what the bank would want to start negotiating at) is $24,855. Current TMV on the Lincoln, as of October 5, 2001, is $28,898 from a dealer and $26,590 from a private party.

Now, if we really want to buy the Lincoln, we can either write a check for the residual amount, or we can play hardball. Playing hardball means looking at the Lincoln from the bank's perspective and figuring out how to use that perspective to our advantage. See, in a perfect world, a bank would never deal with a car once it's been leased. The lessee would simply extend the lease or buy the car, making the bank's life very simple. But if you turn a leased car back in at the end of a contract, the bank now has to deal with the following:

  • Transportation fees — to ship it to an auction
  • Inspection fees — to prepare it for sale
  • Auction fees — to place it on the block in front of buyers

As you know, banks are in the business of making money, not spending money, and dealing with a lease return is not their favorite pastime. In addition, recent history has shown that banks are losing millions of dollars every year on leased vehicles simply because they aren't living up to their predicted residual values.

How does this affect you as your lease contract nears termination? It simply means that while your vehicle may have an official residual value, the actual price you have to pay to buy it from the bank is likely far lower. Let's go back to our Lincoln LS for a moment. The residual is $24,855, but what would this car actually sell for at an auction? An auction, remember, that is full of spendthrift used car dealers who are looking to flip a vehicle for a quick and easy profit. According to TMV, trade-in on our Lincoln is $24,472, so you can bet a profit-seeking dealer's buying price is a fair clip below that. And don't forget those fees I mentioned above. The bank has to pay to have lease-return vehicles transported and inspected, and they also have to pay a percentage of the sale price to the auction house.

Let's say the transportation fees for the Lincoln are $500, and the inspect fee is another $200. Now let's say a dealer isn't willing to go more than $20,000 to buy the car (a figure I personally think is optimistic, particularly given the current economic climate). So the Lincoln is purchased for $20,000, but the bank has to pay a few hundred dollars in auction fees, plus another $700 in transportation and inspection fees, giving them a final figure of $19,000 for the LS.

So, do you still think the bank will stand by its $24,855 buy-out figure as listed in the lease contract? I'm betting that a serious offer of $20,000 would look mighty attractive to said lending institution, saving them not only a cool $1,000, but also the time and personnel factor of dealing with a lease return. That's $20,000 for a clean 2000 Lincoln LS with 35,000 miles on it. This same luxury sedan had an MSRP approaching $40,000 only 24 months earlier.

And if you think I'm just making this stuff up, you'd be interested in the story of an employee who was recently approaching the end of his three-year lease on a 1998 Toyota 4Runner Limited. The official buy-out was $26,000, but the bank immediately dropped to $23,800 before our employee even made his first offer. After some hard negotiations, our man scooped this clean Toyota up for $20,500.

Once again, the selling price wasn't nearly as dependent on the vehicle's stated residual value as it was on what the bank thought it could get for the vehicle at auction. For the bank that has to depend on auctions to sell its vehicles, "market value" is a relative term. Remember that when it comes time to negotiate your buy-out price.

Either that or go to the auction yourself; just watch out for those feelings of enthusiasm and nostalgia. They'll make you do things your wife doesn't much appreciate.

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