Every operator has felt the effects of the changes in our industry this past year: a reduction of program car availability, price volatility of risk vehicles and limited finance options.
In past years an operator might acquire a few used vehicles to meet specialty or short-term seasonal needs—but going forward, used vehicle acquisitions will become a necessity for many rental car operators.
This list of best practices will guide you in acquiring used vehicles for your fleet needs.
Only Buy What You Need
Many operators in a panic to “fleet-up” will buy too many vehicles and/or vehicles of a type that truly do not fit their needs. Make sure to identify your volume and vehicle type requirements before you start buying.
Look on the Fringe
One consideration for buying properly, especially if you are a franchisee or are affiliated with a national reservation group, is to look for “fringe” vehicles that are in a particular car class but not necessarily promoted by the corporate reservation group.
Look also for fringe vehicles in a higher car class as well. You may be able to acquire them for a price comparable to a featured car in a lower class. By doing this, you have the opportunity to meet vehicle demands in both car classes. Don’t get hung up with buying a particular brand of car—diversify.
Know the Resale Potential
The other key consideration in vehicle selection is resale potential in your market. Having an idea of which used cars sell well in your market will help you to select or shy away from particular brands or models. If you are depreciating your vehicles properly and keeping them in service for a reasonable amount of time, you will be in a great position to sell your vehicles when necessary. (See sidebar.)
Which Content Retains Value?
Content is huge, not only for rental revenue but also for resale value. Items such as alloy wheels, sunroofs, multi-disc CD players and cruise control all add hundreds of dollars to resale values. Many times, these components are not VIN specific—so find out what options are available and confirm the content.
Factor the Mileage Points
Though vehicles with the least mileage should obviously be selected, many of the larger rental companies and certainly the manufacturers selling used cars make price allowances at specific mileage points. Mileage steps are significant to a retail dealer because the financing entity and potential buyers might have limits at certain mileages (10,000, 15,000 and most definitely at 20,000).
As a result, sellers of large volumes of program cars base their vehicle pricing methodologies more on mileage than even something as critical as condition. Try to identify these “break points,” as they can save you hundreds of dollars for only a few more miles.
Check With Your Mechanic
When buying used vehicles, also keep in mind dealer service and parts support in your area. If a dealer of the brand you are considering is not in your immediate area, check with your local mechanic to ensure he is comfortable repairing that vehicle brand.
While many repairs can be made by a competent mechanic, issues involving parts delays and major drivetrain issues requiring component exchanges can limit the capabilities of even the best technicians.
Warranty offerings vary by manufacturer, as do the transferability of these warranties. As a general rule, the lifetime or long-term powertrain warranties offered on new vehicle deliveries are limited to the first/original retail customer and are not transferable.
It is a good idea when buying a used vehicle brand for the first time to research the warranty coverage and transferability in advance. Most manufacturer Web sites provide this information, but if you are still unsure, contact your local dealer of that brand. Providing them with a sample VIN should make it easy for them to confirm coverage.
What Price to Pay?
Knowing what vehicles you want to purchase is the most critical step in the process. To get an idea on pricing, you can utilize various sources. Contact your local auction for recent auction results, research vehicle pricing guidebooks and talk to your peers.
Remember that vehicle pricing is dynamic and driven by many factors, including condition, seasonality and supply/demand relationships. Yesterday’s price is just that—and tomorrow’ price will be different. By doing the research in advance, you will be able to recognize an opportunity quickly.
How Are You Funded?
In these times of limited credit, the price you pay may invariably not be as important as what your lender will finance. Many banks fund at some percentage relative to actual auction purchase price. If, however, you acquired the same vehicle from a wholesaler, they may only fund at a percentage of one of the guides (e.g. Black Book, Kelly Blue Book, Manheim Consulting Data Services). This amount may actually be less than the amount funded on an auction purchase.
So even if you are buying vehicles “back of book,” in some cases, it might make more sense to buy at an auction if your lender will fund a larger amount. Confirm funding levels with your lender in advance.
Know Your Other Costs
One more thing to keep in mind regarding prices: Know the other acquisition costs in advance. Auction and transportation fees, registration/titling fees and wholesaler fees can all add hundreds to your acquisition costs.
How to Buy at Auction
Auctions are a great source to fill immediate vehicle requirements. Additionally, they provide great indicators of future vehicle demand.
When buying from an auction, make sure to get to the sale early. Walk the cars, inspect the condition and confirm accessory content. Some dealers will shy away from units with minor dents/dings or cracked windshields. If the damage is easily repairable, like a windshield, or within your comfort zone for a typical rental car, you might be able to pick up a “good buy.” As mentioned before, try to determine the mileage/price breaks for additional savings.
Some manufacturers hold closed dealer auctions (only allowing dealers of that brand to purchase). However, some of these dealers will sell the program cars to rental accounts, provided that the units stay in rental service for a reasonable amount of time.
If you have a relationship with a dealer that will purchase cars for you under these circumstances, refrain from immediately wholesaling these closed sale cars, regardless of how much money can be made. The loss of a source of quality used vehicles for rent is not worth the possible gain.
Eliminate the Middle Man
Wholesalers are another great source of used units, but try to determine if they are getting the vehicles direct from the source or if there are multiple wholesalers involved. Each middle man will add additional expense to you. Many lenders will require you to provide copies of titles in advance, so when working with a wholesaler (especially a new source) get copies of the titles. This will give you a good idea of the chain of vehicle ownership.
Get a Damage Guarantee
Finally, if you are unable to inspect the vehicles in advance, ask the wholesaler to provide condition reports or, at the very minimum, get a guarantee of average and maximum damage amounts.
Network for Deals
Through licensee meetings, develop relationships with other operators and corporate location managers and fleet managers of your brand. Seasonality affects each market differently. Convertibles do well during the winter in Phoenix—but bring on the first few days of 100-degree weather, and it is time to ship the cars to the coasts, mountains or Midwest.
Consider Your Competition!
Your local competition may be a good source for used vehicles, depending on your respective vehicle requirements. Typically a non-airport local market operator can efficiently take a high mileage unit and obtain another year’s worth of operation.
Additionally, you and a local competitor may consider pooling your needs to acquire vehicles from large volume sellers that you might not otherwise have had access to.
Buying Off the Block
Some manufacturers—but not all—will sell returned program vehicles outside of an actual auction. Typically they will require that you purchase a certain quantity of units (say, 25 or 50) at one time. Note that there still will be the typical auction buy fees even for an “off-the-block” transaction.
In today’s used car market, bulk deals don’t necessarily bring significant savings, but they do allow you to carefully inspect vehicles and to immediately fill your fleet needs without having to bid against someone who is only buying a couple of units.
Be Nice to Your Lender
Finally, in these tough economic times, keep in touch with your lenders. There have been instances where a lender holding repossessed units has provided a new line or increased an operator’s existing line to keep repossessed units in operation rather than take a loss. Be a problem solver.
RUNNING THE RESALE NUMBERS
To show the importance of resale potential, let’s analyze a sub-compact that originally sold for $13,000 after all retail and fleet incentives and is now selling as a used vehicle in the low $7,000 range. Mileage for an average unit is 10,000-15,000 miles.
For this example we will assume a full used vehicle acquisition price, including auction fees, registration, transfers, titling and transportation, of $8,000. If you had bought this same vehicle new, your lender would, at minimum, have you amortize the vehicle at 2 percent per month, or $260. Since the used vehicle is still in the current model year, consider depreciating the unit using the same $260/month.
Let’s now assume that you keep the vehicle in service for 10 months. Even though the unit could now easily have more than 30,000 miles, you also have a vehicle that could be sold for less than $6,000. How many calls a week do you get from dealers and wholesalers looking for a $6,000 two-year-old car?
Buying a current model used car allows you the freedom to aggressively pay down your vehicles. Once the vehicle has been rented a few times, only you and your fleet personnel know that it was purchased used for considerably less money than new.
David Funston is president of Funston Fleet Services, Inc. a consulting group that assists in fleet vehicle sourcing and remarketing strategies. Funston has held positions with American Isuzu, Hyundai Motor America, DriveTime Auto Sales & Finance, Chevrolet Motor Division and several retail dealer groups in Southern California. To subscribe to Auto Rental News magazine, click here.