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New vehicle inventory levels have plummeted. The ongoing semiconductor shortage has caused automakers to cut production. Drive around town and you’ll see your local car dealership likely doesn’t have much inventory on their lot, and if they do, it’s likely used vehicles, not new.
More and more dealerships are turning towards “factory orders“. Generally speaking, this is a good thing, as it allows the customer to get exactly what they want. The issue is, as far as we can tell from our community of thousands of savvy shoppers, those people who placed orders are getting the runaround.
“Your car will be built next week and shipped to us soon,” is a common phrase we’re hearing, and then sadly weeks go by without an update. Automakers are simply struggling to do what they’re supposed to do best; make cars.
To put into perspective how dire the current new vehicle inventory situation is, we’re going to compare the current market days supply and inventory levels of a few of the major automakers to their prior levels in 2019. Let’s dive in.
Ford Inventory Levels
Ford has made headlines for many reasons in 2021. Their current inventory levels are one of those reasons. In September of 2019, Ford had 621,000 new vehicles in inventory across the United States. At current sales rates, that represented an 82 day supply of inventory on their dealer lots. Today, as of September 2021, Ford has 210,800 units of inventory in the market.
Toyota was initially hailed as one of the automakers who would be able to mitigate the effects of the chip shortage and retain their production capacity. That was until Toyota announced a 40% decrease in production in October as a result of supply-chain issues.
In 2019 Toyota had 444,000 units of inventory in the market, at a 50 days supply. Today, Toyota has 135,200 units of inventory in the market, at an 18 days supply. Staggering.
Honda’s inventory levels in September of 2019 were healthy, with 351,700 units of inventory in the US market. Today they have less than 100,000 units of inventory for sale in the United States.
Hyundai and Kia have also struggled during the chip shortage. In 2019 they had 210,400 new vehicles in dealer inventory. Today that number stands at 79,400, with a days supply of inventory of 17.
If you’re looking to buy a car in 2021 the price you are going to pay will be higher than in prior years. We recommend you do not buy a vehicle right now unless you absolutely need to. If you do need a new set of wheels we encourage you to consider leasing instead of financing. More on that here.
Because of the shortage of new vehicles, used cars have appreciated in value as well. If you are going to buy a used vehicle, be sure to get it pre-purchase inspected.
The idea of selling a leased car for a profit was once a foreign concept. Today —amidst an ongoing chip shortage and subsequent new vehicle shortage — selling a leased vehicle for a profit is more common than you think. How can you sell your leased car and make the most money? Which types of vehicles are worth the most compared to their residual value? What automakers are making it more difficult for you to make money selling your lease? We’ll answer these questions and more!
Let’s dive in.
How to Sell a Leased Car
The steps to sell your leased vehicle are not too terribly complex. Here they are from Ray Shefska:
1. You need to first buy the vehicle from the lease company.
2. Call the lease company and get your current payoff. Get a 10 day payoff to allow enough time for the funds to arrive at the bank.
3. Make arrangements to buy the vehicle out directly from the lease company if they allow you to do so. Not all leasing companies allow this, so you will need to ask your particular lender.
4. If you cannot pay cash for the vehicle, make arrangements to finance the balance. Some lease companies can assist you with this. If not, check with your credit union or local bank. We can even help you with that…
5. If buying the vehicle out with the assistance of the dealer, be aware that the dealer may charge you their doc fee, collect all taxes due, if any, and collect the title and registration fees. They can also assist you with financing if needed. A word of advice: they very well may attempt to mark up the interest rate on the loan and also attempt to sell you their normal F&I protection products.
6. Once you have purchased the vehicle and had the title and registration issued in your name you can then sell it.
7. To sell your previously leased vehicle for the most money, compare quotes from online car buyers like Carvana and Vroom. We’ve made it even easier for you to get all your quotes in one spot! Simply enter your vehicle information below…
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8. If you decide to sell to a third party, you will need to provide them with your loan account number so they can contact the lender to get the current payoff. They will make the payoff and you will receive whatever balance is remaining. You will need to provide them with the title if you have it or you will have to sign a motor vehicle power of attorney instructing the bank to release the title to the buyer when the vehicle is paid off.
9. If you are selling to a private party, advertise the vehicle and always be sure to meet any potential buyer in a very public place and bring along someone to accompany you.
10. Never allow the potential buyer to test drive the vehicle by themself. Always accompany the potential buyer on the test drive and have your friend tag along as well.
11. Establish the test drive route prior to leaving and set the ground rules for how the vehicle is allowed to be driven. The driver must obey all traffic safety rules and stay within the posted speed limit at all times.
12. Once you have agreed to sell the vehicle, complete the transaction at your bank, credit union, motor vehicle agency or local police station to protect all parties from any issues. Be certain to make sure that buyer’s funds are indeed good prior to releasing any paperwork or keys to the vehicle.
13. Do not allow the buyer to drive off using your tags and registration.
Which vehicles are selling for the most over their residual value
Our friends over at iseecars.com did an incredible job analyzing millions of vehicles for sale to determine which cars, trucks, and SUVs are selling for the most profit over their residual values. As you’ll recall, residual values are set when you sign your lease. These values are the leasing company’s best guess as to what the vehicle will be worth at the end of the lease.
Because the current new car shortage was not foreseen in 2018, residual values are well below the actual value of nearly every leased car. This means that lessees are in positive equity positions; they can purchase their lease at the preset residual value, and it is worth more on the open market. Incredible!
What vehicles are selling for the most over their preset residual values? First, let’s establish that the average off-lease used vehicle is worth 31.5% more than its original residual value. That’s shocking, but compared to the top ten, it’s relatively reserved!
Which Automakers Are Making It Harder For You to Sell a Leased Car
A host of captive finance companies (financing company’s owned by automakers) have taken steps to make it more difficult for consumers to sell a leased vehicle for profit. Toyota, GM, Honda, Acura, and Mazda are just a few automakers that are no longer allowing third parties to make the payoff payment on a lease. Ford has not allowed third parties to do this for years.
A headline from Automotive News for GMA headline from Automotive News for Honda and Acura
What does this mean?
This means that you have to go to a franchised dealership to buy your leased vehicle before you can sell it to a third party. In the past you could go to Carvana and they could payoff your lease for you. Now, you’ll need to go to the dealership, buy the vehicle, get the title, then sell it to Carvana (or another third party).
Why are Ford, GM, Toyota, Honda, and Mazda doing this? Because it increases the chance that the dealership will be able to get the off-lease vehicle from you. Dealers are short on supply (cars to sell), and by forcing lease customers to come back to the dealership they are increasing their chances of buying the car from you.
You don’t have to look far to see that there is currently something unprecedented going on in the automotive industry. From the empty dealership lots you drive by, to the news stories you’re hearing about a “chip shortage,” it’s clear something very serious is impacting manufacturers, dealers, and ultimately people like you and me; consumers.
We’ve documented in the past how the ongoing semiconductor (chip) shortage is wreaking havoc on manufacturer’s ability to produce new vehicles. Ford is storing F-150’s in country fields and race tracks, Jaguar Land Rover is informing their investors that they’re losing more money than anticipated because of the shortage, and dealers are making record profits because they can sell their limited inventory above sticker price (MSRP).
To suggest that what’s going on in the market right now is ridiculous would be an understatement. We’ve never seen anything like it.
Traditionally, buying a car can be pretty intimidating. You find something online, go into the dealership, sign the paperwork and then you’re left wondering, “did I get a good deal?” In today’s market the answer more and more frequently is “no.”
Uninformed buyers are agreeing to pay for crazy add-ons, unheard of additional dealer markup, and ridiculous F&I products, simply because they don’t know better. That’s why today we want to share with you the simplest explanation for why you should be leasing a vehicle right now instead of buying it. If you know someone who is thinking about getting a car in this market, please consider sharing this with them.
Here we go …
Why you don’t want to finance a car, truck, or SUV right now
To understand why leasing is the smarter option today, let’s start by explaining why financing (i.e. taking out a loan to purchase) a vehicle is not advisable right now. I wrote about this in depth a few weeks ago, but the long and short of it is this:
Vehicle prices are inflated, which means the loan you take out on the vehicle will be for the inflated purchase price. Let’s say you get a five year loan, well, over the next five years as vehicle prices normalize, you’ll still have your loan for the original amount (when prices were inflated). This means you’ll be in a major negative equity position (the vehicle will be worth considerably less than what you owe on the loan).
Why is this important? Because in normal times many people would find themselves in $2,000 to $3,000 “negative equity” positions, and that was without inflated vehicle prices at the time of purchase. In today’s market, those same people will find themselves in much more severe negative equity positions because they took out a loan on something that isn’t actually worth as much as it’s selling for right now.
So what options do you have?
Leasing means you don’t own anything, and that’s great
This is where leasing comes into the picture. When you lease a vehicle you don’t own it, you rent it. Leases make a lot of sense in today’s market because they allow you to fulfill your need (having mobility), while also mitigating your risk of taking on debt that will burden you into the future.
Let’s look at a tangible example. Here’s a lease deal for a 2021 Toyota Camry:
You can see the MSRP is $26,701, and the dealership is selling the vehicle at that price. The residual value is down in the bottom left, and it is 52%. That means that at the end of the lease term (36 months and 36,000 miles) the leasing company (Toyota Financial Services) expects the vehicle to be worth 52% of its original value ($13,885).
The residual value is not negotiable. It is the best guess from Toyota as to what they think the vehicle will be worth at the end of the lease term. Since the pandemic we have not seen meaningful changes in residual values. This makes sense, because the residual value is an estimate as to what the vehicle will be worth in three or four years, not next week. Even with inflated vehicle values today, leasing companies expect their vehicles to return to a normal depreciation curve in the future.
By leasing, you are effectively renting the vehicle for 48% of its depreciation.
Your other option is to finance the purchase of the vehicle. If you do that you will be financing the total purchase price, plus taxes, plus fees. On this Camry deal that likely comes out to $30,000. Typically Camry’s would sell with a dealer discount and significant manufacturer rebates. Obviously in today’s market that’s not what’s going on.
Once used vehicle prices return to normal and this Camry depreciates as expected, you’ll owe significantly more on the loan than what the vehicle is worth. Compare that to our leasing option, and after three years you can walk away from the lease and purchase a Camry then (likely with the dealer discount and the manufacturer incentives we’re accustomed to).
The real benefit of leasing right now is that it means you will not be in a severe negative equity position in three years, and by that time vehicle prices will have normalized as new car supply has returned to normal. At that point it would make much more sense to purchase a vehicle (new or used) since their prices will not be inflated.
In the meantime, if you do finance a vehicle, be prepared to face a sobering reality when you check the value of your vehicle in 24 months. It’s going to depreciate, and if your loan is for thousands of dollars more than what it’s actually worth, that’s going to be a tough pill to swallow.
