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Here's Why I Went Broke as a Used Car Dealer

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author photo by Tyler Hoover February 2017

When people ask why I'm no longer a full-time used car dealer, I often joke that I became like a restaurant owner who was eating too much of my own food: I was enjoying my own product (personal cars) so much that I didn't have any left over for customers. While it makes for a nice visual, it's not really true. Let me explain why I really failed as a used car dealer.

In my video, you get to see the most fun part of being in the business -- and that's going to the auctions. If you're a total car junky like me, nothing is more exciting than going to the weekly auction and sniffing out deals. There are hundreds of cars to sort through, which you can visually inspect and thoroughly shake down before the sale. Most auctions offer their own little drag strip, where you can flog a car through its paces. It's so much fun, and buying a car at auction for a fantastic price gives me a much bigger rush than anything offered in Las Vegas.

Once I purchased the cars, selling them was rarely an issue. Like other smart used car dealers, I specialized in certain models and became an expert with them.

My first focus was the XJ-body Jeep Cherokees (made from 1984 to 2001), which were tough and simple and remain very popular to this day. But they suddenly disappeared from auctions, and what few crossed the block were junk -- or fetched silly prices. They simply became too old and scarce to be a reliable source of inventory.

From the first day I opened my doors in the beginning of 2010, a supply of used cars was always an issue. The summer before had wiped out an entire generation of inventory with the Cash for Clunkers government incentive, which offered $4,500 for any used car in exchange for a new one. While this is an oft-cited source for the lack of good used cars, there were other forces at work.

With the great recession in full swing, people were hanging on to their used cars longer than ever. Broke buyers wanted cheap used cars, which skyrocketed wholesale prices. Credit scores tanked as well, which led to something else: Buy-Here, Pay-Here dealerships.

These dealers became their own banks, offering financing to credit-challenged buyers -- a high-risk model that came with a very high reward. These dealers are only interested in dependable cars that will last through the term of their high-interest loans, which means that any old Japanese car, like a Camry or Accord, can sell for near-retail prices at a wholesale auction. Overpaying for a car matters little to them, as they stand to make thousands extra per unit through their financing.

Of course, the rise of the Internet also created additional competition -- and recent years have also seen the rise of new car dealerships selling increasing numbers of used cars.

These days, most new car dealerships fill more than half their lots with used cars -- and they've adopted many of the used car dealer strategies to maximize profits. This means they keep virtually every single trade-in they can, sending only the "rejects" to a wholesale auction.

When you peruse the older inventory of a typical wholesale auction, the vast majority of the offerings aren't high-quality -- a figure that's way up in recent years. This means you get to play your own automotive version of CSI when you're at the auction: You have to enter the mind of the previous owner and figure out why they traded in their car for a low wholesale price. Was it because they wanted something newer -- or because they needed something newer?

As if things couldn't get any worse, cars are getting more complicated than ever. If a dealer wanted to specialize in European imports, their best friend had better be a gifted mechanic with $10,000 in diagnostic equipment, because otherwise it's a suicide mission. There are many multi-thousand-dollar pitfall repairs with these needy imports -- which is the main reason people dump them at dealers for something else.

In the beginning, when I was a small dealer with a little warehouse, I did fantastic. I could cherry-pick my inventory and I knew everything about it, but I quickly fell victim to the "grow or die" business philosophy.

After two years, I moved to a prime location with a big lot, quadrupling my overhead costs. To pay for this, I had to stock a lot more inventory. I didn't have the time to both cherry-pick my cars and run a larger operation, so I became sloppy with buying. This meant higher reconditioning costs, a longer wait before a car was offered for sale, and less profit.

For the first time in my life, I knew the stress of not having enough money to cover my expenses, pay my mortgage and provide for my family. I saw the writing on the wall, and moved on to something else. I walked away from a decade of experience, connections, and doing something I enjoyed, because I knew the used car business would never provide the lifestyle I wanted.

Thankfully, my passion for cars morphed into a deranged hobby, which led me to writing about it here. For those who were hoping to get in the business, there are still opportunities. If you can do some of your own wrenching, stay small and specialize in a particular brand or a few different models, you stand a chance. Let me give you an example.

Let's say you choose to specialize in Pontiac Azteks. First of all, you need to know everything about them, inside and out. You should know every awkward body crease, and all their quirks and common issues should be intimately familiar -- and you should have cheap means to fix these problems.

Also, every dealership in town needs to know you're the crazy idiot paying top dollar for wholesale Pontiac Azteks. You have to ensure a steady source of inventory.

Finally, you have to figure out how to market Azteks to Breaking Bad enthusiasts and somehow convince the general population to buy them as well. You have to become an evangelist, the Billy Graham of Pontiac Azteks.

To sell your fleet of hideously clad SUVs, you have to give up your nights and weekends, and take phone calls at all hours of the day. Unlike in most retail businesses, customers take pride in haggling so that you make little to no money. Your customers will also want to put your head on a spike if their Aztek has any issues after the sale -- other than all of their friends laughing at them for buying one.

The wider the net is cast, the more diluted your brand is, and the more likely you are to make mistakes. Let's say you also choose to sell the similarly hideous Hummer H3. This means you have another vehicle to become intimately familiar with, to know all the issues of, to find buying sources for, and to figure out how to market. When you add a wide variety of different makes and models in inventory, things become even more difficult.

If you have the skills and are willing to make the sacrifices, it's possible to make a decent living -- but for me, it didn't seem like much of a life. So I moved on to selling burgers.

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Used 2007 HUMMER H3
Used 2007 HUMMER H3
$14,900
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Here's Why I Went Broke as a Used Car Dealer - Autotrader