How f(l)at is the used car market?

I learned the hard way the difference between a $100 an hour lawyer and a $500 per hour lawyer. I went to see Derek Harp, CEO of The Drop-Spot, on Friday to discuss Engenius Motors and a possible partnership. I found out that Mr. Harp and his team had spent a decent amount in legal fees in search of the answer to a question my lawyer and I had answered rather easily. I didn’t realize the size of the money backed monster I was taking on.

For those of you who don’t know (which is probably everyone), I’ve been working on a start-up over the last 3 months called Engenius Motors, which is a company determined to cut the fat out of the used car market. You see there is an enormous disparity between a typical trade in value and the dealer resale value. For example on Kelly Blue Book a 2003 Acura CL 3.2 Coupe with 56,000 miles can be valued as these three figures in Columbus, OH:

Retail Value

Mileage:

Now these numbers are in no way exact, but the difference between them tends to be fairly accurate. So a dealer would be able to pay $11,695 for a trade in and then turn around and sell it for $18,895 without doing anything (I’m assuming if they touch the car whether to clean it or inspect, the price only goes higher). We all could be a lot better off if the car owner could sell it for $14,000 and a buyer could buy it for $14,000, right? Now I know some of you are saying well what about all those bad people out there who could sell us a rebuilt wreck, don’t the dealers protect us from them? No, they don’t. There are companies built around eBay Motors that can not only fulfill the functions of the dealer in this situation, but actually do them better. There are private, independent inspection companies such as Carchex that could inspect your car and certify it’s condition, good or bad, for $100. You could get a vehicle history report for $25 at Carfax and most cars are covered by a 1,000 mile/30 day warranty through eBay Motors. Essentially you could be covered better than a dealership can cover you (because all of these companies make money regardless of the car’s condition, but a dealership only gets paid when you buy), and you’d save $4,000 for the exact same car! So why doesn’t everyone sell themselves? Because it’s a painful process, and nothing is easier than trading a car in. That’s where Engenius Motors comes in. We want to make selling it yourself as easy as trading it in with the prices a private seller gets. As you can see from all tools above, it would truly benefit us all if a whole bunch of “virtual” dealerships popped up to facilitate the sale between private owners. The problem is, it doesn’t benefit the people with a lot of money, and a lot to lose.

The National Automobile Dealership Association is an enormous lobbyist group representing the needs of car dealerships across America. They have successfully clamped down both state and federal laws to prevent firms from doing exactly what I set out to do with Engenius. Because the NADA has such a lock down on laws, it has been difficult for anyone to develop a business model that improves this process. As a result we just see constantly evolving bulletin boards starting with your local newspaper classifieds to cars.com. Ebay Motors is the only real site to challenge the traditional sell it yourself methods by providing auctions which remove those horrible negotiations that are usually associated with selling a car yourself. But even the enormous $13 billion eBay motors is under pressure from the NADA to not cross into dealership territory. They too only charge two flat fees of $40 to people selling their cars, one to list and the other when the “auction” closes. They can not even charge a FVF, which is their big moneymaker elsewhere on the site, (Final value fee, a % of the sale price) in order to prevent the NADA lawyers from accusing eBay Motors of “selling cars.” In order to prevent companies from squeezing out the inefficiencies associated with the used car market, which would be to maximize the number of people selling their car directly to private buyers, the NADA has been able to get incredibly powerful laws in place.
So here I am slowed, but not stopped. Fresh off my reading of Thomas Friendman’s The World is Flat, I know that what’s best for the market always prevails. There is a whole lot of fat in the current used car market when there doesn’t have to be. We have the internet to connect to a world of buyers and sellers, security checks to prevent buyers from being ripped off, and a market pricing system that seeks out the true value of each car. The new keys to selling a car is a good marketing package and presentation, independent certification of your car’s condition, and a trusted name. All of which would be provided by Engenius Motors and other consumer aid companies. Instead we face an enormous legal wall, but as readers of Friedman’s book know-walls in the way of efficiency, sooner or later, will come tumbling down.