Franchised dealers eye opportunity in off-lease

CARY, N.C. - 

Off-lease vehicle volume is rising, used-vehicle prices are falling and Brian Benstock, vice-president of Paragon Honda and Paragon Acura, counts it all opportunity.

He’s looking forward to selling or leasing new vehicles to consumers when their leases expire and plans to buy a lot of those lower-mileage, off-lease vehicles for his thriving certified used-vehicle operations.

And though the industry expects a glut of off-lease vehicles to put downward pressure on new- and used-vehicle prices in the coming months, Benstock said it’s just “normal” market “ups and downs.” Honda and Acura residuals are holding up well, he adds.

“I’m excited about a lot of cars coming off-lease. Those cars need to be replaced, so there’s an opportunity to sell more new cars,” said Benstock who expects his Woodside, N.Y., dealerships to this year exceed the 3,012 certified used Hondas and 1,048 certified used Acuras they sold in 2016.

“And if the value drops on used cars, we’re going to pay less for them and that will create a value for the potential buyer. I’m bullish on the fact there are more off-lease cars.”

Price pressure

Edmunds estimates that 3.5 million off-lease vehicles will return to the market this year and the number will grow to 3.9 million in 2018 and to 4.2 million in 2019. That’s up from 2.5 million in 2015 and 3.2 million in 2016. That added volume is exerting downward pressure on prices of late-model, used cars and trucks.

For example, from the first quarter of 2010 to the first quarter of 2017, the average value of 3-year-old used vehicles increased 8.7 percent while the original MSRP of 3-year-old vehicles grew 14.7 percent in the same time period, according to Edmunds.

Lower used-vehicle prices can make it harder and more expensive for consumers who owe more on their trade-in than it’s worth to get auto loans.

Ivan Drury, senior analyst at Edmunds, said “42, 43 percent” of all new-car buyers have trade-ins and of that number, at least 25 percent owe an average of $5,000 more on their current vehicles than they are worth.

He said the overall percentage of buyers saddled with negative equity “is not overwhelming but what is so scary is that the (dollar) amount is so high.”

So far, interest rates are not a problem for dealers seeking financing for their customers because the increases have been small and most of the credit tightening is at the subprime level.

But Doug Wolford, vehicle exchange and lease manager at Oxmoor Toyota in Louisville, Ky., keeps his eye on interest rates and overall economic conditions such as housing and healthcare costs, anyway.

“It’s been 5 or 6 years since we’ve seen rates we’re going to be seeing in the next 12 to 18 to 24 months,” Wolford said. “I get credit apps on 95 percent of my customers and I listen to them. Student loan debt is a killer.”

CPO “maturing”

For years, off-lease vehicles have been the bread-and-butter of manufacturer-backed certified used-vehicles programs. But those sales are “maturing” and “not growing as fast” as they did in previous years, cautions Anil Goyal, senior vice president of automotive valuation and analytics at Black Book.

Incentives are lowering new-vehicle transaction prices so close to the prices of certified used vehicles that many consumers are opting for new instead of used, Goyal said.

“We are in a market that has plateaued and declining in many respects,” Goyal said. “Certified will tick up a little bit this year but it will be under the 5 percent.”

Even so, used-vehicle prices are high and Benstock believes CPO sales have room to grow.

“There is strong demand for used cars,” he said. “There is a significant portion of the dealer body not participating in certified programs, and remember there is several times the number of used cars are sold in the nation as new cars. Until we get that certified number closer to one-to-one with new, I think we still have a lot of room for growth.”

Todd Caputo, owner of Sun Chevrolet in Chittenango, N.Y., is already seeing his new-vehicle sales slowing down.

But he anticipates stocking more and lower-priced off-lease vehicles at his Chevy store and his two used-car dealerships.

To aid the effort, he’s building a new dealership in Cicero, N.Y., to replace his existing Sun Auto Warehouse used-car store. The $6 million, 43,000-square-foot facility will be twice the size of the current store and is to open in November.

His other used-car location is in Cortland, N.Y.

Caputo said his three dealerships retail about 5,000 used vehicles a year.

He added: “Savvy franchise dealers will be able to capitalize on off-lease vehicles and be more profitable with used cars.”

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