What’s My Trade-in Worth? Not Very Much at CarMax

I've written about trade-in values previously, but a recent experience drove home how scary it is for car buyers to get an accurate and fair dollar amount for their present car.

CarMax is the largest retailer of used cars in the world. They also sell new cars in a few of their locations but used cars are their forte. As a Toyota dealer for 37 years, I routinely shop my competition as do most businesses. Last week I sent my mystery shopper to CarMax in Boynton Beach. He drove there in a 2004 Mazda6 and feigned an interest in buying a 2010 Mazda6 using his old car as a trade-in. The CarMax salesman, Paul, gave our shopper a price of $14,999. That was plus a $199 dealer fee, and a $12 markup on the electronic filing fee. In addition to that was the standard sales tax and tag and registration fee. The next step was to appraise our shopper’s 2004 Mazda6 trade-in. This process takes about 30 minutes and the appraisal was for $2,000. Now, CarMax is one of the few car dealerships that truly don’t haggle over price, neither the price of the car you’re buying or the car you’re trading. Some dealers advertise that they have fixed prices with no haggle, but they will haggle if you try.  Our shopper tried to haggle, but to no avail. 

Here’s where it get interesting. More people buy used cars, sell used cars, and trade in used cars to CarMax than any other car dealer in the world. Because of their no-haggle, no-hassle one-price policy and very friendly and ethical reputation, they have grown to dominate used car sales worldwide.  CarMax doesn’t have the lowest prices, but they have the highest trust of their customers. They even have a 5 day money back guarantee on the cars they sell…no questions asked. Other dealers advertise guarantees, but it’s always an “exchange” for another car, not your money back.

We carefully appraised the 2004 Mazda6 before we visited CarMax. Three of our appraisers agreed that the wholesale market value was $3,000. One guide book, Kelly Blue Book valued it at $3,500. When I found out that CarMax had appraised it for one-third or $1,000 less than the true value, I was incredulous. I thought we might have made a mistake, but upon careful scrutiny I was reassured that the $3,000 value was accurate.

One of my appraisers was a former appraiser for CarMax and I discussed this discrepancy with him at length. Here’s what I discovered. CarMax adjusts all of their appraisals downward by a factor dictated from their central corporate office. This factor is called the “Appraisal Cost Adjustment” or ADR and it is based on an algorithm or matrix which is determined by CarMax’s central office. The local CarMax appraiser appraises a customer’s car for the true market value and then subtracts the dollar amount dictated by the ADR. The bottom line is that our mystery shopper’s trade-in was reduced by about $1,000 to just two-thirds of its true wholesale market value. I say “about” because I don’t know what the CarMax exact appraisal was and I don’t know exactly what the CarMax ADR is. However, I can tell from looking at the 2012 fiscal year CarMax annual stockholder’s report that CarMax averages $953 wholesale profit on every used car they sell. This means that they pay their customers, on the average, $953 less than the true wholesale value.

As a competitor to CarMax, this is amazing to me. Most car dealers actually lose money on the average wholesale cars they sell at auction. The goal of most dealers is to break even on wholesale profit or loss. The reason for this is that attempting to appraise a car below the true value can cause the dealer to lose the sale of the new car or used car they are retailing. This is simply because the dealers’ competitors will offer that customer higher trade-in allowances and win the business. In their last fiscal year CarMax made $300 million in profits on wholesaling cars that their customers traded in. Put another way, CarMax made “double profits” on their customers…a profit on the car they sold the customer and a profit on the car the customer traded in. Now remember, I’m not talking about making a retail profit on the customers’ trade-ins. This is something all dealers try to do, including me. I’m talking about making a wholesale profit on those trades that they couldn’t or wouldn’t retail. This kind of wholesale profit is unprecedented in the retail/wholesale auto industry.  Now, please understand that car dealers will deliberately under-appraise a trade-in when they think they can “get away” with it. The common vernacular for this is “stealing the trade”. This occurs when a customer is so focused on getting a very low price on the new or used car they’re buying that they neglect to carefully consider their trade-in allowance. Also, trade-in allowances can be inflated beyond reality through the use of artificial markups on the new car via addendum labels, or, as I call them “phony Monroneys”. But, most car dealers average about $100 loss on every trade he wholesales vs. CarMax making an average of $953 profit.  I can understand now why Warren Buffet bought stock in CarMax.

Now don’t get me wrong, I’m not accusing CarMax of doing anything wrong. There’s absolutely nothing illegal or unethical about allowing a customer below market value for her trade-in…any more than it’s illegal or unethical to charge a higher price for the new or used car you retail than your competition does. CarMax does a lot of things better and smarter than most other car dealers which has allowed them to earn the trust of their customers. CarMax customers, not only trust them, but they look forward to a true haggle, hassle free buying experience. You combine all of that and it gives CarMax something called “pricing power”. Customers are willing to pay CarMax a higher price for the car they are purchasing and accept less for their trade-ins.

However, my advice to CarMax customers is to “have your cake and eat it too”. Enjoy the haggle, hassle free and trusting environment of CarMax, but shop your trade-in with at least three other sources. You will likely be able to sell your car to another dealer of the same make as yours for more than CarMax will allow you. Had all of CarMax customers done that during the last year, they would have saved an average of $953 per car, totaling $300 million!