Millions of vehicles are sold at dealer auto auctions every year. These auctions are restricted for the general public and only licensed dealers can participate. As with any wholesale market exhange, prices of vehicles sold at dealer auctions are lower than those advertised on any dealer's lot, which begs the question, why would anyone forgo a potentially higher sticker price to take their inventory to a dealer auction where it will be auctioned off for thousands less than retail? One might also wonder if there is something wrong with cars that end up at the auctions – why else wouldn't a dealer go after a bigger margin by selling those cars at their own lot?
Of course, there are a number of vehicles that dealers have tried selling on their lots for some time to no avail before deciding to cut their losses short by disposing of them quickly at the auctions. Maintaining aging inventory costs dealers both money and reputation. However, old or otherwise unattractive inventory accounts for a minuscule portion of the cars sold at auctions. The large part of vehicles sold at dealer auctions is comprised of off-lease returns, replaced rental fleets, company cars, repossessed vehicles and trade-ins.
Let's look at these sources individually and examine the advantages or risks associated with each of them:
Off-lease: vehicles returned to the financial institution at the end of a lease term. Closed auctions are usually the only venue for such financial institutions to dispose of a large volume of end-of-lease returns.
Advantages: the terms of a lease normally put a restriction on the number of miles driven, require regular maintenance and penalize for excessive wear. Usually, off-lease vehicles are returned within 2-3 years, often before their original factory warranty expires. Risks: off-lease vehicles are older – two or three years are standard terms of lease.
Off-rental: rental companies normally replace their fleets once a year, releasing a flood of late-model cars to the secondary market. Like the big financial institutions that underwrite car leases, rental companies also rely on auto auctions to sell off their used inventory. Advantages: these vehicles are well maintained and driven for only one year. Risks: mileage tends to accumulate quickly on a rental car. Optional features are skimpy – you can count on their having an A/C and automatic transmission, but these cars are otherwise as close to the base model as they can get. Usage of rental cars is rough; chances are that during that first year each rental car will be driven by a normal distribution of all types of drivers in all kinds of conditions.
Company/fleet cars: companies of varying sizes own or lease cars, trucks or vans that they typically keep for two or more years, although it is not uncommon to see current year models sold at the auctions. Advantages: adequate maintenance and large volumes of similar vehicles. Risks: like rentals, these vehicles do not have a whole lot of extras and get thoroughly exploited on a daily basis. Unlike rentals, usage of company cars varies greatly from the executive luxury sedan driven slowly and carefully on occasion to the delivery truck that regularly mounts curbs and gets abused in city traffic.
Repossessed: vehicles can be voluntarily or involuntarily repossessed by financial institutions for delinquency or another reason for recall. Auto auctions are again the bank's only option for deliverance. Advantages: repossessed vehicles can feasibly sell for less because the financial institution disposing of them only seeks to offset its losses (also restricted by a federal regulation). Risks: the condition of such cars may be compromised by neglect. There is also the potential for sabotage from ill-meaning previous users (think extensive keying or tearing of the interior).
Trade-in: dealer inventory that is aging or does not meet their profile (e.g., your old Toyota Avalon that you traded in for a shiny new CLK350 Cabriolet at a Mercedes-Benz franchised dealership). Advantages: traded-in cars may have useful extras and sometimes even after-market modifications (for those consider this an advantage). Risks: the overall condition of such vehicles varies greatly. Some may be considerably older and out of warranty.
Among these types of vehicles one can find a good number of quality cars ready to market. Late models with remaining factory warranty are not uncommon. The law requires listing dealers to disclose mechanical problems, which may void the manufacturer's warranty and classify the vehicle as junk, salvage, lemon/consumer buy-back, etc. There are special auctions for the adventurous and the mechanically inclined, which sell salvage, rebuilt or junk vehicles, whose source is mostly insurance companies. Other types of auctions specialize in the sale of police or government cars; some of those actually allow public access.
Pricing. Regardless of their source, vehicles are sent to auction with the main purpose to be sold quickly and hassle-free, and this usually happens at prices that dealers can easily recoup with a small profit from a resale. You have probably heard stories that cars can be bought at the dealer auctions for unreasonably low prices. This may happen if there are not enough interested bidders or if the vehicle is exceptionally unattractive, but it is rarely the case and should not be taken for granted. In fact, many sellers put reserve prices on their stock specifically to prevent this from happening. The reserve price is not disclosed publicly and a “winning” auction bid is only considered a sale if the reserve price is met. Sellers have the option to re-list vehicles that did not sell at a particular auction.
Condition. As with any used vehicle, one should not expect to find a car in pristine condition at the auctions. Used cars are for people who do not value the “new car smell” so highly as to spend a few thousand dollars extra at the franchise dealer's showroom to get it. Many aspects of the vehicle appearance may suffer in the term of everyday use and one should expect any combination of the following damages: stained or otherwise used upholstery, scratched bumpers, dings on the doors, chipped hood, dented quarter panels. Most of these can be fixed with touch-up paint and/or a dent removing kit. Scraped wheels and worn tires may cost more to repair or replace.
Inspection. Pre-sale inspection or test-driving is not allowed at the auctions. The most a buying dealer can hope is to visually inspect the car and turn the engine on, without actually driving it. Mechanics and guests are not allowed to see the cars until after the sale is completed. Some auction locations inspect and prepare the cars for sale if the listing dealer so chooses (at a premium). More extensive reconditioning is also available.
Dealer auctions are an indispensable clearinghouse of used vehicles, offering both a wider exposure to selling dealers as well as an unmatched variety to buyers. Understanding how these car dealer auctions work and what to expect to find there helps alleviate some of the anxiety related to taking part in them.