Wholesaling used cars is not ideal, but it shouldn’t be avoided at all costs. When you can’t retail a vehicle, wholesaling is the best thing you can do for your dealership.
Wholesaling can make a huge impact on your end-of-year numbers, especially the quality metrics that lead to higher profits.
Even though wholesaling can be painful, it is a necessary evil in our industry. Wholesaling isn’t about making more money, but simply living to fight another day.
There is a right way and wrong way to wholesale. Be sure to avoid these 4 common mistakes:
Mistake #1. NOT Wholesaling
The first mistake dealers make is not wholesaling in the first place. Wholesaling can be painful because you might lose your profit or even take a loss on a vehicle. But not wholesaling can hurt you even more in the long run.
Holding onto a vehicle is tempting. Every car will sell at some point, right? There are a couple reasons why not wholesaling is such a big mistake:
Unlike real estate, vehicles depreciate... fast. The longer you hold onto a vehicle, the less it will be worth when you sell it.
Let’s look at an example. According to VinCue, a 2016 Honda Civic EX with 30,000 miles and in average condition retails at $16,300.
By comparison, a 2015 Civic EX with the same mileage and condition is worth only $13,720. That’s a difference of over $2,500. You would lose $200 for every month you held onto this Civic. At some point you have to cut your losses.
Now you might say to yourself, “Any profit is still profit!” But you’re forgetting an even more important metric: Turn rates.
Turn rates are important because you only have so many spots on your lot. For every vehicle that doesn’t sell, you lose a chance to sell another vehicle in its place.
Imagine your dealership had that 2016 Honda Civic from the last example. For some reason, (maybe the car is lime green), it doesn’t sell in the first 30 days. You hold onto it because you know Civics are popular.
However, you still don’t sell the Civic until 90 days after purchase. That means you lost $600 (3 months depreciation) but still net $2,400 profit.
Instead, imagine that after 30 days you decided to wholesale your lime green Civic and earn your money back. You stock a grey 2016 Civic in its place and it sells in 30 days. Then you put another grey Civic in that spot and it sells in 25 days. You net $2,800 profit for each vehicle.
In the time it took you to earn $2,400 off the lime green Civic, you could have made $5,600 profit off faster-moving vehicles. No loss, more than double the profit.
In some cases, you might even need to wholesale a car at a loss. This is still better than holding onto a car too long. Even if you lost $1,000 from wholesaling the lime green Civic, you would have still earned 50% more off the two Civics you sold in its place.
Mistake #2. NOT Sticking to a Wholesale Plan
Not wholesaling a vehicle in a timely manner can cost dealers thousands of dollars. That means you need to have a wholesale plan… and stick to it.
Whenever dealers ask us about wholesaling, we recommend sticking to a strict 30 day plan. If you don’t retail a car in 30 days, get rid of it, even if you don't make a profit.
"If you don’t retail a car in 30 days, get rid of it, even if you don't make a profit."
Sticking to a plan protects your turn rate, a huge indicator of profit performance (as we saw in the example above). Ideally, dealerships turn over their entire inventory 12 times a year, or once a month.
When you don’t stick to a wholesale plan, your sourcing program becomes hard to manage. If you know you’re turning inventory every 30 days no matter what, it is very easy to plan your future inventory. Your profits also become more predictable.
All-in-all, sticking to a wholesale plan makes your dealership operations more predictable and profitable.
Mistake #3: NOT Wholesaling Your Vehicles at Auction
There are two main ways to wholesale a vehicle:
- Wholesale auction
- Independent wholesalers who visit your dealership
It is certainly convenient to wholesale your vehicle to someone who comes to your lot. You might even have a good relationship with a few wholesalers who visit you often.
However, if you really want to cut your losses, you are better off wholesaling at the auction.
The reason simply comes down to demand. At an auction, people are literally bidding on your vehicle. You’re letting the open market dictate the value of your car, not just 1 or 2 people with their own vested interests.
This is not a hard-and-fast rule, but dealers will generally earn more money when wholesaling at an auction vs. an independent wholesaler.
Mistake #4: NOT Detailing and Cleaning the Car Before Wholesale
So you didn’t retail a car and you’re ready to wholesale. You might think there’s no need to clean and detail the vehicle, right? Wrong.
Wholesale is not all that different from retail. You are still selling to another human being, and all humans get wrapped up in appearances. A clean car implies quality and value.
It might cost $100 to clean and detail a vehicle before wholesaling. That little investment can make a huge difference. You could earn another $500-1,000 at wholesale just by making your vehicle presentable.
Think of it this way: By cleaning and detailing before an auction, you are helping another dealer imagine what that vehicle will look like on their lot. They visualize the happy customer walking through their door and paying a premium for that beautiful used vehicle. That’s a powerful trigger that will earn you more money.
Wholesaling Used Cars: Live to Fight Another Day
Wholesaling is never the best option, but it’s necessary for the long-term health of your dealership.
If used car sales have stalled out, there might be other problems you need to fix.
But even when sales are good, you’re bound to end up with cars that don’t move. When that happens, you need to cut your losses with wholesaling. Have a wholesale plan (ideally 30 days) and stick to it. Try to sell the vehicle at auction before resorting to independent wholesalers, and don’t forget to clean up the vehicle beforehand.
By avoiding these common wholesaling mistakes, you will save your dealership a lot of headache and ultimately earn more profit. Remember: With wholesaling, you’re living to fight another day. Fight on!