Are Used Cars Better Than New?

It’s a busy morning at EuroMotorcars in Devon, Pennsylvania, along the Philadelphia Main Line, so it will be a few moments before a salesman can come to the phone. While we’re waiting on hold there’s a little message from the dealership; a piano plays a lilting melody in the background as a voice intones, “Many Mercedes-Benzes go out as leases. When they come in off lease it’s like they’re coming home, to the people who’ve taken care of them all their car lives.”

The mood is so genteel, the voice so plummy and cultured, that for a moment it is hard to remember that what they’re talking about is used cars.

It wasn’t always this way. Dealerships existed to sell new cars, vehicles displayed shiny and freshly waxed in the showroom. If you looked like a likely buyer, the salesman might invite you to slide in and inhale deeply of that most heady of parfums, the new car smell. Buying a new car was the American Dream in microcosm.

Used cars were different; they were shunted off to a side lot with desperate appeals like “Make me an offer” scrawled in DayGlo across their windshields while salesmen dressed like carnival barkers lurked nearby. When bought and driven home, the circumstances of their purchase was scant cause for jubilation; kids never poured into the driveway yelling: “Hurray! We got a used car!”

But by the early 1990s, consumers became increasingly aware that there was a third kind of car on the road: the Certified Pre-Owned Car, or CPO. For car buyers like Randy Knox, a diet counselor from Paoli, Penn., the appeal of the CPO was self evident. “It’s a great way to go,” says Ms. Knox, the happy owner of a 2008 Mercedes C300 she acquired last year. “I got a car that looks brand new, fully optioned, with only 20,000 miles on it and saved almost $20,000 of what the car would have cost new.”

It wasn’t just the car but also the process she found appealing. “Mercedes gave me five days or 500 miles to return the car if I changed my mind. I liked that. Best of all I have the peace of mind of knowing that if anything happens I’m fully covered by the same warranty I’d get with a brand new Mercedes.”

Still, she had one question: “How come they never came out with a deal like this before?”

The fact is, even if the car makers had wanted to, they probably couldn’t have. Or if they had, they would have gone broke backing up their warranties. Complain though we might that “They don’t build ‘em the way they used to!” according to J. D. Power & Associates, cars have never been so reliable, so well-engineered, and so defect-free as they are today. As a rule of thumb, a well-cared-for car that is two to four years old today will last longer, be more dependable, and be less expensive to maintain than a new car was 10 years ago.

To a large extent CPOs were the product of the era that gave us the Internet, speed dating, and federally mandated safety and environmental features like improved bumpers, safer seat belts, cleaner exhaust systems, and more environmentally benign fuel injection systems.

Alas, when it came time to trade in their old cars, owners expected to get a car with all the technology they’d been hearing about – automated brake systems, satellite navigation, and sound systems with dedicated tweeters and woofers. What they did not expect was the dramatic rise in price. Largely due to federal mandates, the average cost of a new car had soared from $7,530 in 1980 to $15,900 in 1990, an increase that was, percentage-wise, far greater than the average car buyer’s increase in income.

Customers who’d become accustomed to trading in their old cars every three to four years were horrified to learn that in order to keep payments on par with what they’d been paying, they would have to step down in class or extend the terms of their contract. At the same time, their old car had depreciated to the point that its trade-in value no longer put them into the newest version of the same car.

The high price of a brand-new car wasn’t the only factor discouraging consumers from buying a new car. In 1986, Congress began dismantling the provisions for deducting interest on installment loans and sales tax, making the purchase of a new car an even more expensive proposition in terms of real dollars. Even with the economy booming, more and more consumers could not afford to buy a new car.

But they could afford to lease one, especially given the freewheeling use of lease subvention. “Subvention was a popular tool of the 1990s,” says John Bulcroft, president of the Advisory Group, an automotive marketing consultancy in Cresskill, New Jersey. “It allowed you to lease a car for much less than you might otherwise. Say you’re leasing a $30,000 car for three years, after which the car will be worth $10,000. That dictates a payment of $349 a month. Then the manufacturer might say, ‘That’s too high. Nobody’s going to pay $349 a month for that car. Let’s pretend the car will be worth $15,000 at the end of three years, not $10,000.’ So now your payments will be based on a residual value of $15,000, not $10,000.”

Of course, says Bulcroft, the manufacturer still had one problem. “How could he make up that imaginary $5,000 when the car came back off lease?”

The cars themselves presented the answer, says Bill Zadeits, president of the Cherokee Automotive Group, whose holdings include Automotive Remarketing, which covers news from the used car, certified pre- owned, remarketing, auto auction and auto finance industries. “Cars coming off lease were usually only two or three years old; they looked new and they were generally better treated than used cars. Further, the dealers who had originally sold the cars usually knew their full service history. So they advertised the best of these off-lease vehicles as a whole new kind of car, a Certified Pre-Owned Car.”

The process of certification, a thorough bumper-to-bumper inspection, was not to be mistaken for extended warranties of the past, says  Zadeits. “An extended warranty was little more than a kind of insurance product; it had little to do with a car's condition and individual history. Instead, it was based on the statistical likelihood of a given model breaking down or otherwise requiring repair.”

By contrast, says Zadeits, a certified pre-owned car was nothing less than a better car. “If anything goes wrong with the car it can be serviced at any franchised dealership, the same as with a new car.''

Even though selling cars as CPO looked good on paper, some dealers were reluctant to offer the program. “Used cars are a lot tougher than the new car business,” says Jeremy Meyer, Audi Certified Pre-Owned Manager, a veteran of 8 years selling new and used cars retail. “Every used car is different. It’s up to the salesman to tell a story and build value in his product whereas every new car is the same; I could sell new cars under three feet of snow. It really takes a better eye to deal in the pre-owned market. If you manage the business right, you can make a tremendous amount of money; if you make mistakes, you're out of business. So we’ve had varying levels of engagement; those dealers who have embraced the program are headed for record years in CPO sales.”

At BMW, says Stephen Saward, Manager of Pre-Owned and Corporate Sales, the success of the CPO program has erased whatever stigma may have been associated with selling used cars. “I think some of our dealers approached the used car end as an unpleasant necessity but that is no longer so, given the popularity of our CPO’s. Last year we sold 219,000 new BMW’s and 168,000 pre-owned cars, so the ratio is about 4 to 3 in favor of new. But where a new car is new only once, a BMW is always a BMW.”

At Honda and Acura the advantages of a certified pre-owned program became evident shortly after the sister marques launched their first CPO program in1996. “Eighty percent of our CPO customers were new to the brand,” says Dan Crowe, Honda Automotive Remarketing Manager. By this time a whole different mindset had begun to permeate the pre-owned market. “Certified prospects were not people who could not afford a new car,” says Crowe. “They were bright, they were well-educated, and they had spent an average of 7 hours on the Internet before coming in to the showroom. For these people, a Certified Pre-Owned was simply the smart move.”

The parameters of certification and the benefits vary from car maker to car maker; Mazda offers 100 points of inspection while Chrysler offers 125 and Ford and Volvo, 169 and 330, respectively. Collectively the alleged inspections provoke a howl of protest from Phil Tegtmeier, a prominent concours judge and proprietor of PhilVille, an exotic car brokerage in Morgantown, Penn. “I could look at a tail light and start counting functions – left turn, right turn, backup light, flasher, and so on – ad infinitum. This is not to say it’s not a great sales tool but I would wager that 75% of the CPO inspections that are advertised are never done. Even if they are you’re still better off having an independent mechanic examine the car and not rely on the dealership.”

Tegtmeier admits he doesn’t certify all the the various Ferraris, Maseratis, and Aston Martins he handles. “A brake job on a Ferrari can cost $20,000.  Do you think I’m going to cover that?”

These words of wisdom notwithstanding, the CPO business promises to continue its growth of recent years, says Automotive Remarketing. One reason for this, says Zadeits, is the number of Ford, Chrysler, and General Motors franchises that were forced to close at the turn of the millennium. “It’s hard to convert a car store to something else,” he says. “You’ve got service bays, floor to ceiling windows, so they became pre-owned dealerships.”

To enable these stranded dealers to compete by providing them with their own pre-owned certification and warranties, Zadeits established his own certifying entity, CarMark. “We’re presently in 24 dealerships in 19 states. We don’t know exactly how big the market is for non-franchise CPOs is but there are somewhere between 35 million and 40 million used cars sold each year in the United States,” says Zadeits. “The difference is, a franchise dealership can offer a certified program from the OEM for as much as $3,000 or he can offer ours, which costs less.”

Either way, the pre-owned dealer gets one more certified pre-owned car on his lot, the car manufacturer gets a higher residual value come trade-in time, the used car salesman gets a newer car to weave a story around, and the buyer gets a car that looks new.

“It’s a win-win-win,” says Zadeits.

Maybe, but as Tegtmeier observes, no matter what the make, year, model, or terms of sale, one thing has not changed in the 40 or so years since he’s been in the car business. “There’s really just one thing you need to know,” he says.

“Who are you buying your car from?”