“The money is made when you buy, not when you sell.” I don’t know to whom this quote belongs but I’ve known it to be true throughout my time flipping cars.
General Strategy
What I have personally done is to aim for the American Pickers method when buying. The ballpark way those two guys approach buying items is that they try to purchase items for about 50% of what they figure they’ll ultimately sell for. This gives them room to transport, refurbish and market the items. I’ve found that, in general terms, this strategy transfers over to vehicles pretty well also. The benefit of having this 50% initial threshold is that it enables you to quickly assess the viability of a vehicle. There are certainly times where I have willingly paid above this 50% threshold but in those cases I had inspected the vehicle and assessed the necessary repairs to be of minimal cost. There have been other times that I have offered people under 50% of the potential market value due to the condition and unknowns involved with buying a vehicle in extremely poor or non-running condition. So far, this approach has served me well.
I bought this ’08 Victory for about 60% of market value.
I bought this ’06 Miata for about 43% of market value.
No blind guessing. Guessing means you don’t know. To ensure you make money, and don’t lose money, you have to know the costs involved. If you buy a vehicle without knowing what the parts or repairs are going to cost you then you’re guessing, and you’ll only be successful by chance. On the above Miata, I went to two body shops for repair quotes before I bought the car. I knew what the repair would cost me. Based on that I was also able to establish the maximum price I was willing to pay for the car, beyond which I knew it wasn’t worth pursuing financially.
No blind hope. Blind hope means you’re not confident of what you know. As you’re thinking through the problems with a vehicle, if you keep hearing the mental phrase “I hope this” and “I hope that,” then you need to stop and figure out how to better quantify those unknowns. You’ll bear the costs whether they are known or unknown but its much easier to make intelligent decisions when you know the costs.
Careful with the compassion. Being too compassionate puts money in the wrong person’s pocket. I’m not condoning taking advantage of someone who is not capable of conducting a transaction competently. My point is that by being too compassionate I think people over pay for things all the time. I’ve listened to car sales people say that they were giving up their commission on a sale in order to make it happen. What a lie. They’re preying on people’s emotions in their deception and probably do it because it’s worked in the past (and because their ethically corrupt). Other times I’ve heard people say, “I don’t want to offend them by offering too little.” When I sell vehicles I get hit with lowball offers all the time and if the person makes said offer while we’re standing face to face I’ve never been offended. On the other hand, it does drive me nuts when people make lowball offers sight unseen via email or whatever messaging platform I’m listing it on. Those people are never serious or honest in my experience.
Many people are too compassionate. My Grandpa used to buy new cars and tell the salesman what he was willing to pay for it. Invariably the salesman would look at him and say “I can’t make any money at that price.” To which my Grandpa would reply, “I don’t care if you don’t make any money.” Eventually, an acceptable price for the car would be established and the car would leave the lot. Other times, not so much.
Establish the Market Value
Whenever I’m interested in a vehicle, I always look it up on Kelley Blue Book to determine the market value. I’ve heard all sort of arguments about using other assessment tools/providers but the fact of the matter is that I have consistently used KBB for appraising my vehicles and have consistently sold them right around their appraised values. The other reason I’ve stuck with KBB is that they also provide values for motorcycles. The challenge with motorcycles though is that they don’t provide a private party value, only a retail and trade-in. So what I do is just take the average of retail and trade-in for the motorcycles as my approximate private party value; this has worked pretty well for me.
Make a List
Whenever I inspect a vehicle I create a list of the items that will need to be replaced or repaired and then I price each of those items out on a spreadsheet. Often times the pictures people provide in their postings are comprehensive enough that I am able to compile this information prior to physically going to see the vehicle. Numerous times in doing this I was able to figure out that there was no way to make my 30% margin with all the parts that were bad, so I would cross that prospect off the list and look for another one. In all honesty, with this approach, pretty much every time I have gone to physically look at a vehicle I’d already decide to try and buy it; the only question was, for how good of a deal?
Again, the goal is to ensure all your expenses in acquiring, transporting and repairing the vehicle are covered when it comes time to sell the vehicle, so make sure you line item all those costs. The following is a comprehensive list of the main items and categories that I quantify for each vehicle I assess:
- Purchase price
- Fees (if acquired at auction)
- Tax, title & license
- U-haul (if I have to tow it home)
- Gas expended while towing
- Shop fees (body or mechanic)
- All parts
- All fluids
- Insurance
You also need to be cognizant of the fact that there are going to be surprises in the vehicles you acquire; issues that went unnoticed during inspection or simply hadn’t quite failed yet. This isn’t something to worry about, you just need to factor it into your assessment. In a way, this is no different than the risk we run with our daily driver’s. The alternator can fail tomorrow without warning but this doesn’t mean that we refuse to drive the car today. Life is full of unknowns. Just preemptively set some money aside for those unknowns so you don’t get bit when they do arise.
Making Offers
The outlook I have on making offers is that I’m not worried about offending the other person with a lower offer than what they may be anticipating. It’s completely up to them whether or not they accept it; which really means they’re in control. As the buyer you can always make a higher offer if they decline your initial offer, but if you start too high you can’t go back down. So the question you have to ask yourself is “what do they really want to get for it”?
In the course of conversation I will share this hobby of mine with people and often someone will say, “ohh, but isn’t that risky?” I usually just grin and say, “No, not really.” I know my numbers and I stick to them. Risk is based on comparing the knowns with the unknowns. If there are too many unresolved unknowns with a potential vehicle, then I pass on it. I don’t buy vehicles that I want if they don’t make financial sense and I don’t hang on to vehicles because I “love” them. To me, the vehicle is an investment and while I enjoy vehicles the motivation is the financial benefit they provide. That true financial benefit is not fully achieved until it leaves the driveway for the final time.