Understanding Used Car Pricing

Used car prices are elusive, despite numerous attempts to harness them. We’ve all heard of Retail, Private Party and Trade-in values. But do these actually help in determining a vehicle’s real value? When we turn to the web for prices, it can get even more cloudy. One web site places a retail value on a car at $18,000. Another puts it at $21,000. What price should we believe?

If sellers are looking to get the highest price for a car that they’re selling, and the buyer wants to get the best deal possible, is there such thing as a fair used car price for both parties?

The answer is yes, but both parties have to be on the same page.

Let’s call this “page” Fair Market Value.

How do we interpret the market to determine fair market value? Since most sellers and buyers are going to try to interpret the market to his or her advantage, let’s see if we can even the playing field.

One of the most profound remarks I’ve heard to establish a better playing field for used car pricing reads like this (paraphrased):

“To find market value, you need to take all the pricing data you find for a particular vehicle and throw out the high and low prices. What’s left in the middle is where you’ll find a fair market value.”

While this doesn’t address the used car pricing problem entirely, it does remove the unrealistic numbers that many clutch to. It moves folks to more reasonable prices according to the market.

A lot of time is spent on popular web sites (for better or worse) to help determine used car pricing. But one should also follow and watch the market to see what cars are being advertised and actually sold for—if they’re being sold at all.

Used car prices are influenced via auction pricing, and industry used car guides such as Black Book and the NADA Official Used Car Guide.

These books, however, don’t settle the pricing debate. Here’s a publisher’s note on the inside cover of the latest NADA guide.

It states:

The vehicle values in the N.A.D.A OFFICIAL USED CAR GUIDE,® are developed by N.A.D.A’s editors based on many sources of information. These include reports of actual transactions throughout each area for which the guide is published.

The values in this guide assume a vehicle is clean. Appropriate deductions should be made for reconditioning costs incurred to put the vehicle in a salable condition. An exceptionally clean vehicle or one that bears a guarantee, warranty, or manufacturer certification should bring a premium price.

Please read your guide carefully when determining the value of optional equipment. N.A.D.A.’s editors believe that most optional equipment has little or no value on older cars. This is especially true of options that cost relatively little when new and which deteriorate with age or use. Only the more popular vehicle options are listed in the guide. Unless otherwise stated, all vehicles are assumed to be equipped with automatic transmission, air conditioning, compact disc player (and/or AM/FM stereo cassette,) power steering, rear window defroster, and tilt steering wheel. For other standard options, please review each vehicle’s listing.

As you can see, even the most respected used car pricing guide assumes quite a bit, leaning heavily on the opinions of its editors to determine appropriate deductions and thus the ultimate value of a particular car.

So where does this leave buyers and sellers? After both parties throw out the high and low prices, it leaves them in the middle of the market. This is where both will get a fair shake.

Lastly, and perhaps most importantly, since we are spending real money buying a car, or as the seller, working to provide a quality car, we would never want to “assume a vehicle is clean.” This one sentence by the leading used car pricing guide, is a blanket statement that has disastrous effects in the used car market.