Why Are Cars Sold At Auction and When is it Time to Wholesale?

July 1, 2022

Team ACV

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Why Are Cars Sold At Auction and When is it Time to Wholesale?

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Have you ever wondered why a used car dealership wholesales vehicles? How do you decide whether a vehicle is a better fit for the showroom or auction? There are three major factors to consider when selling cars online or at physical auctions.

  • Maximizing profits
  • Maintaining a balanced car inventory
  • Moving inventory

There are many reasons to wholesale a used car. While insurance companies, financial institutions, and other parties also sell used cars at auctions, dealers often have a specific rationale.

Read on to learn about the most important KPI when it comes to wholesaling used cars. Trying to decide what’s right for your inventory? We’ll also share the eight most compelling reasons to consider selling used cars at auction.

Inventory Turnover Rate is Key

Before you jump into why used car dealerships should consider wholesaling a vehicle, you’ll need to know your inventory turn rate. This is a dealership KPI that will help you understand when to wholesale a car.

Your auto inventory turnover rate is how many times you sell your entire stock in a year. Each one is a sales cycle. Here’s the formula to figure out what your turnover rate is.

  • Formula: Units sold annually ÷ Number of units in stock = Turnover rate
  • Example: 600 units sold annually ÷ 50 units in stock = Turnover rate of 12
  • Application: 365 days ÷ Turnover rate of 12 = 30.4 days per sales cycle

If for whatever reason you don’t think a vehicle will sell within one sales cycle, then you may want to send it right to an auto auction. This way, you’ll maximize profits on the vehicle rather than letting it sit on the lot.

8 Reasons Cars Go To Auction

As a dealer, you know that lingering vehicles often lose money. Yet, that needn’t be the case. Cars that fail to sell within a given sales cycle may be prime candidates for auction or wholesale. Not sure if a vehicle is ready for auction? Check out the 8 most compelling reasons to consider sending cars to auction.

1. The Vehicle is Underperforming

It costs a lot of money to keep vehicles on the dealer‘s lot. There are maintenance fees, the physical space the vehicle takes up, and the value of each one. If you bought a vehicle with floor plan financing, then you're paying interest on the value of the car. All this to say, it's in your dealership's best interests to move car inventory quickly.

If a vehicle is underperforming, it may be time to send it to a car auction. Many dealerships have pre-owned aging policies of 60 or 90 days. This means they send vehicles that reach that age to car auctions.

2. The Vehicle is an Old Model

Sometimes trade-ins or buyback vehicles are old car models. While keeping a few older models on the lot can help diversify your inventory, you don't want to hold too many. Customers tend to want more recent pre-owned vehicles, especially for their safety ratings and gas mileage.

3. The Vehicle is High-Value

Have you ended up with an expensive sports car or another high-value vehicle? Expensive cars tie up a lot of capital until they sell. Because of this, you need to move such units fast. If your customers won't buy them quickly, you may want to consider wholesaling.

4. You Have Too Many of the Same Model

Often dealers can get too many of the same car models as trade-ins. If it's a popular car in your area, it makes sense to keep a few. But don't keep too many of the same cars on the lot. Instead, send your overstock to a car auction.

5. The Vehicle Doesn’t Fit Your Market

A huge part of your car dealer inventory management should be dependent on your key consumers. Who are you selling to? What are their demographics? Needs? Income?

If a used vehicle doesn't fit car buyers‘ needs, there's no reason to keep it on the dealer‘s lot. Instead, send it to auction and make a profit on it (or at least break even).

For example, if the vast majority of your customers are college students or young single people, stocking a ton of vans doesn't make sense. If you get an abundance of vans as trade-ins, it may be a good idea to send most of them off to a car auction.

6. The Vehicle Doesn’t Match Your Geographic Location

Similarly to potential customer needs, you'll want to know your potential customer locations. This should inform which vehicles to keep in the lot and which ones go to auction. For example, if you are in a densely populated city, then auctioning off most off-roading Jeeps makes sense. Instead, stock types of cars that thrive in your location.

7. The Vehicle has a High Reconditioning Cost

Some trade-ins have higher reconditioning costs than expected. They may need a lot of repairs, come totaled, or have other issues. While they may sell, sometimes it's not worth the significant investment to fix them up. Instead, you can sell them at auction as-is to recoup some profit.

8. The Vehicle is Too Complicated

Often dealers will send vehicles to auction to avoid a hassle. A vehicle may be too old, have a mileage discrepancy, have a bad CarFax, or have other concerns.

Auto auctions take vehicles as-is. This makes selling at a car auction a great way to get rid of complicated units.

Why Do Cars Go to Auction? Because It’s the Right Choice for You.

No matter what your car inventory looks like, you’ll likely consider auctioning vehicles at some point. What you do with each vehicle depends on your inventory strategy, financing situation, and your customer base.

If you're looking to sell cars at an online car auction, we look forward to working with you at ACV Auctions! Start wholesaling your units by registering below.