The buying and selling of used cars can have one the highest margin per item sold of any buying and selling small business but also has its fair share of problems and stresses.
This business buys a used car, adds a markup and resells it. It can be a way to make large profits by only selling a few vehicles compared to other businesses where you have to sell a lot of an item to get a similar return, but due to the complex nature of vehicles is can have a lot of headaches.
Most people in South Africa cannot afford a new car and many will never be able to afford a new car in their lifetime.
The local market can essentially be divided into maybe four or five parts:
The bottom of the market
The low-end market
The middle market
The high-end market
The vintage and exotic market
The bottom market
The bottom of the market is where cars are traded without papers, years behind of licencing and often is not the possession of the registered owner. As scary as that might sound it is very common in lower-income areas, to own a vehicle in this way. And you often see cars sold (at a discount) in this manner. I would advise avoiding this market, yes there is money to be made if you are willing to run around a bit, but you are also likely to get stolen cars, even with a legal car the price may be high to get it into a roadworthy condition (one of the reasons a legal car’s ownership has not been previously transferred). Some legal owners also let their car license run years in arrears, a person like that does not seem to me like someone that is going to maintain a vehicle very well.
The lower end of the market
This is where you get the “cheapies” usually around ~R30k (above and below) Corsa Lite, City Golf and some other VW models, Toyota Tazz, some old-timer bakkies and some other cars that have a poor resale value like the French Renault and Peugeot brands, you also get a lot of “rough” cars here (high-mileage cars that have not been well looked after). This is where most small business guys operate, they make maybe R5k-R10k on a car, sell one, two cars car a week. It can be an OK business for some. This business can have cars with a lot of problems because people often sell cars with problems for cheaper and these guys buy and just resell it “voetstoots” or as is leaving the buyer and new owner with the problem.
The middle end of the market starts at >R100k and here you essentially find two kinds of cars. On the lower end usually cars out of motor plan, the “bargains” are usually high-mileage company cars (often sales reps cars). And you also get the “certified” used market these are better looked after cars but they cost more.
The higher end of the market are usually R500k and upwards although these days (with the crazy increase in car prices) its usually like R750k and above.
The vintage and the exotic market can have both rare (well-maintained) old cars and “super” cars.
How to source cars
We know in any buy-and selling business, we need a place to buy it and a place to sell it. We know there is demand for cars, we know there are lots of places to sell them. But buying cars is often the competitive advantage. Regardless of what market you operate in having cash money in this business is usually what leads to getting bargains.
Buying and selling from classifieds (low-end)
In this model, the buyers’ trawls classified sites where cars are sold, sorts by cheapest and see what is available. This requires you to keep your ears close to the ground (set up alerts or view the site multiple times a day) and be able to look at and buy the car asap. There are some middle activity here as well but its hit and miss, you might get a bargain maybe if a person is emigrating and wants to sell quick.
Dealer networks (low, middle, high)
Many dealers in SA participate in dealer networks which are B2B platforms where they list cars that have been traded in, but it’s not really a car that fits in their lot, maybe its too old, maybe its too rough, high mileage etc. There are well-maintained cars with motor plan also traded here and the dealers who traded in the car want to liquidate it immediately to access the cash. Here is a lot of middle-market guys who buy cars here and make tens of thousands per car, the only thing is that the car usually stands a while before they realise the profit.
Buying fleets of cars
Many companies sell their cars as a fleet. When a vehicle reaches the end of its motor plan lifespan, the smart thing is to sell that car and buy a new car because the cost to maintain that car is going to increase (dramatically in the case of German and other European cars) but a car is not worth much out of a motor plan to a company not just because of the reason I just mentioned but the depreciation and the tax-deductible expense of buying a new company vehicle outweigh the future cost of maintaining old vehicles. By selling their fleet and buying a new one, they not only get a portion back of the vehicle that already did its job for a few years (and contributed to the bottom line) but they get to write it off. In my opinion, the company way is the only way to own a car, even for private individuals who are well off. The moment that motor plan runs out, you sell that car and buy a new one something which is done by many. Frugal entrepreneur tip: If you cannot afford a new car then buy a used low-maintenance car with widely available aftermarket parts.
The mindset that drives high prices in SA
In many parts of the world when a car motor plan runs out that car loses a significant part of its value, due to the maintenance cost which can end up costing more than the car in the next few years. If you look in the case of German cars, a few parts from the agents can cost as much as a new entry-level car.
Now a lot of South Africans buy cars they can’t actually afford, this has driven up the prices of out of motor plan cars in SA. Unlike in developed countries, South Africans don’t care if that car will end up costing them expensive down the line they just want that badge now to look cool now.
Selling a car
There are a few ways to sell a car. The cheapest and simplest is to just sell it privately from your home and advertise it on online classified sites. Some people park it in an open space with a “For Sale” sign. Others leave it on consignment at a dealership and the dealer takes a cut when sold. A few years ago we sold a sports car this way, even though it was listed for a while on Gumtree and other classified sites it didn’t sell. But it sold fast while parked at a dealership. I think it sold because the dealer had the credibility and the clientele and also he can quickly apply for finance for the buyer.
Selling cars in the rent-to-own model
South Africa has seen some businesses pop up in recent years using the rent to own model. Usually aimed at the bottom end of the market; people with bad credit records that don’t qualify for finance. So they enter into an agreement where they pay a premium for the car monthly (compared to what it would have cost for finance) for the ability to pay it off, but they don’t take ownership until it’s the rental period is paid off. Now with a bank-financed car, you also don’t take full ownership until the car is fully paid off. But the agreement here is different, its more of a rental agreement that kicks in after a certain period. As simple as this business sounds many people entering it has made it complicated. They enter this business, using bank-financed cars, now the problem is they have to pay the bank back every month (with interest), but they also need to pay operating expenses (rent etc.) and salary (and we know the cost of living is high and people like to live lavish) eventually they run out of runway (before they have managed to pay the bank off for the car), and the bank starts calling in the loans and threaten to repossess the cars they financed but the cars are in possession of the people who are renting them and are close to taking full ownership and the business implodes, because the business has defaulted on the loans, has to recall the vehicle from the client/rentee which means no more income coming in and the bank no longer wanting to extend finance to the business.
This industry has recently been disrupted using well-funded companies to run the used car industry like a buy shop like Cash Converters and Cash Crusaders for cars and then quickly photographing it and putting it on website. People walk in (there are even “buying pods” in a few places) and quickly sell their cars with no long stories. This business model like the Cash Convertors guys attract people who want to sell their vehicles fast so they often get less, but on the flip side, a lot of cars that end up here are f-u-c-k-e-d. They are actually transparent, they order Dekra reports on most of their cars. (“A DEKRA Condition Report is a customised, professional used vehicle condition evaluation completed by expert DEKRA Examiners”.)
Most of the bargains at BuySellCars have Dekra reports with issues as long as one’s arm. I recently say a BMW 120i (the old E87 version) listed there for R45k I would say if you must deal with the agents to fix up that car, then you might as well buy you a good used F20 or even F21, 1 series. I have not seen a cheap BMW at BuySellCars that did not have an engine and/or gearbox leak, suspension issues, tyres as smooth as a condom. The owner has likely cut their losses and just sold it to make it someone else problem. Now even though this streamlined efficient model doesn’t scale well with regards to the condition of cars. This model works because we have a lot of stupid people that want to own a certain car no matter what it will cost them down the line and this is why we often see people selling cars still in the name of the previous owner, they never had enough money to even get the car to roadworthy standard the entire time they owned it.
So the conveyer belt buying and selling model might be something to look into. I would suggest you read the one-star reviews on hellopeter to see the issues that plague this business model. There are over 750 one-star reviews but if you read through them you notice a pattern. Yes it is one of the symptoms of any disruptive model, the mistakes you make when you “move fast and break things” but the problem is critical thinking is not taught in our schools so when a business enters with a new disruptive model people’s thinking cannot adapt to the new reality. If you break down the main complaints to me they seem common sense:
You have sellers complaining about low-ball offers after BuySellCall viewed the car after a few minutes. Common sense tells you anyone who makes a decision to buy a car after a five-minute visual inspection is going to buy that car at a discount (to cover him if there are unseen issues), if you have an immaculate car you don’t take it to BuySellCars.
Lots of complaints of roadworthy issues
In the Dekra report, there is literally a column that says look this issue is going to affect the ability to roadworthy the car. Must they spell it out to people that the issue has to be resolved (sometimes at the cost of many thousands) before being taken to roadworthy?
People complaining about cars breaking down after driving home BuySellCars do you think that:
A company that buys a car after it has been assessed for a few minutes, made a low-ball offer that was accepted, is it rational to think that you are going to get high-quality cheap cars from such an institution? No, everybody is ripping off everybody, BuySellCars walk away thinking they got a good deal, the seller of the car with a myriad of issues are relieved to be rid of it and happy someone actually paid them for it. And here comes the consumer thinking because BuySellCars have nice branding and clean building and presentable salespeople they getting good quality cars. It is just not possible, a single car has about 30 000 parts, yes, much less critical parts, but it’s not like you buying and selling a commodity. This business wasn’t meant for scale and certainly not in a country like SA.
But there are lots of businesses like this in SA. Rain, the internet data provider, recently announced they are profitable (in a developed country they would have gone out of business or more likely be shut down by the country’s consumer regulator), these guys have speeds worse than the dialup you got in Mweb’s big black box but desperate people continue giving them their money because uncapped internet in SA is expensive if you cannot access fibre or long contracts. Same with cars, desperate people throw their money at anyone presentable with cheap cars. Both BuySellCars and Rain instead of “fixing” their business model to be more consumer-friendly they engage in a high-stakes game of expensive marketing hoping the new consumers that they sign up exceeds the churn rate of consumers fleeing their business.