We have all heard about 'book value', but what exactly is it? Who decides on the values? Why do some dealers offer below book for vehicles and others offer above book? Who determines that a Toyota , for example, should have high resale value? The short answer is: You do! An item is worth what someone is willing to pay for it. What resale values reflect, is quite simply, the demand for a particular vehicle. The book in question is called the 'Mead & McGrouther Auto Dealers Guide'. Let's have a look at some misconceptions:
Do book values fall mostly at year end?
No, that is a misconception. Book values fall a little each month on a fairly even scale.
The Mead and McGrouther Digests are published monthly. The values (as a rule) fall monthly. In certain rare instances they remain static and sometimes even increase. The latter happens when the economy is going through an inflationary cycle. (For example when new car prices rise too fast.)
How does the vehicle sales data get collated on a national scale?
It is true, to a point, that the values are determined by the public (which is supply and demand). However, many hundreds of dealers all over SA send in monthly sales returns of vehicles, which are then averaged by Mead & McGrouther, after which a formula is applied to those national figures in order to produce a viable set of book values. I strongly suspect that certain of the manufacturers control and manipulate the data sent in to Mead and McGrouther in order to inflate the resale values of their specific products, which they obviously would all like to see.
Is the book value system fair?
It is a fair and reasonable method to arrive at a market value, but it must be borne in mind that the book values are only a GUIDE - and nothing more. There is absolutely no rule which states that you should pay book value, or less than book, or more than book. It is important to be aware of this. At many of the new car dealers, the staff are so polarized towards trading purely on book value that they either make grave trading errors or end up losing business because of their inflexibility to move around the book values.
How does one deal with local variations in vehicle popularity?
For example in the Western Cape, for a very unpopular vehicle (Like a Musso Ssang Yong) I would offer about 50% less than the book trade value, as I know that in order to resell this vehicle, my selling price must be highly competitive. At the other end of the scale, the resale values of the Toyota Land Cruiser are polarized upwards. I have paid up to 35% more than the book value for a low mileage Land Cruiser.
How does the age of a vehicle affect its resale value?
The older the vehicle gets, the more it comes into demand up to the point of about 8 to 10 years old, at which point values fall off dramatically.
The ability to finance a vehicle greatly enhances it's value. Therefore vehicles older than 10 years lose value rapidly. In the same breath let me add, that there are a handful of vehicles that completely defy these laws and rules.
What segment of the market is the most dangerous in terms of resale values?
The dangerous segment of the market is the one year old vehicle. If the new car franchise decides to run a 'special offer' on the product you have just purchased, it could ruin the resale value of your one year old car as it would make the two prices too close to each other. There has to be a considerable gap between the lowest, discounted new price and the book retail value of a one year old vehicle to entice a buyer into buying used and not new.
How do the car rental companies affect the national supply/demand system?
When the large car rental companies defleet and put large amounts of a specific product into the used car market, the value of that product will drop – even if it is only for a few months. It is a typical result of supply/demand rapidly affecting resale values. Too much of a product coming into the market, means lower demand because of over supply with a resultant drop in resale value.
List of products in terms of resale value from best to worst:
- Toyota (excluding Camry and Auris)
- Volkswagen (excluding Passat)
- Mercedes Benz
- Hyundai (excluding Accent, Sonata and Elantra)
- Kia (excluding big sedans)
Poor: (in no particular order)
- Alfa Romeo
- Land Rover
- All Chinese imports (Chery, GoNow, etc.)