Don’t Play Used Car Roulette

Readers of my column and listeners of my weekly radio talk show, "Earl on Cars," (Saturdays 8-10 am EST at www.StreamEarlOnCars.com) have heard my "Mystery Shopping Reports." For 20 years, I've sent a secret shopper to different car dealerships who pretends to buy or lease a car that's advertised and reports back on the experience. Based on their experiences, dealers are listed as either "Good Dealers" or "Bad Dealers" on my website, www.EarlOnCars.com.

Last week, my shopper visited the CarMax used car lot in Royal Palm Beach, Florida. CarMax is the largest used car retailer in the US with hundreds of locations and has always been near the top of our "Good Dealer List." They have a straightforward pricing policy, pay their salespeople a salary, and offer a 7-day money-back guarantee on every car they sell, with reasonable conditions.

Recently, however, CarMax's sales and profits have plummeted, and I sent a mystery shopper to find out why. My Toyota dealership's wholesale expert told me that CarMax wasn't buying many cars at wholesale auctions, which was surprising since they're typically the largest buyer.

My shopper chose a 2021 Toyota 4-Runner advertised on CarMax's website for $40,998, which was $7,000 above the current wholesale price and $3,000 more than my dealership's retail price. The salesperson told my shopper that the vehicle had been transferred from another CarMax lot because it hadn't sold. This confirmed my suspicion that CarMax's sales and profits had decreased because they hadn't written down the cost of cars acquired during the used car bubble that had recently burst.

The microchip shortage ended, new car inventories rose, and prices dropped, causing customers to buy more new cars and fewer used cars. Dealers, including CarMax, were left with overpriced used car inventory. My dealership took a big loss and wholesaled nearly a million dollars of used cars to bring our inventory in line with market prices. Dealers who ignore overpriced inventory will struggle to retail those cars profitably. The smart move is to take the big loss quickly and replace the inventory with fresh cars at the lower, true wholesale market.

This situation means that used car buyers need to be even more cautious and shop around for prices. My shopper could have saved thousands of dollars by buying the Toyota 4-Runner at another dealership that had the sense to rid themselves of overpriced inventory.