Independents battle franchised dealers

The part of the used-car ecosystem that handles the vehicles most banks don't usually finance because of age and mileage has a new predator: new-car dealers.

Amanda Gordon, an independent used-car dealer who owns GoJo Auto in Denver, has seen prices for secondhand cars explode at the auction she attends. The reason: Franchised dealerships are battling one another for inventory.

"When I started buying from this particular auction — I don't want to give my source — there were 30 to 40 dealers there. Now, there are upwards of 250, and 30 percent of them are franchised dealers," Gordon told Automotive News.

Driven in part by the need to replenish empty used-car lots, many franchised dealerships are buying older, very-high-mileage used vehicles that would normally be haggled over at auctions by independent dealers. The bidding wars have nearly doubled auction prices on some vehicles, Gordon said.

"A $10,000 car is the new $5,000 car. Seems like six months ago, if I would have purchased a 2012 Mazda3 for $5,000, that car right now is running through the blocks between $9,000 and $10,000," she said.

At Gordon's store, which sells about 600 vehicles a year, the average transaction price has ballooned to around $17,000 from $12,500.

Competition for used cars "is absolutely driving the price up. If you are talking about budgets, the reality of it is that [new-car dealerships] have more money and more resources to sell the cars. They have more lenders and have more of an audience than an independent would, and it is absolutely driving up prices."

Although many independent dealers sell super-high-mileage vehicles, Gordon doesn't usually handle them unless one is taken in on trade. She prefers vehicles with between 80,000 and 120,000 miles.

"We tend to see customers who have more challenged credit. And a lot of the subprime lenders don't want to see their customers in high-risk vehicles, which they consider to be 120,000 miles or more and are more likely to have mechanical issues," she said. "When someone who has challenged finances and their car breaks down, they may not have the means to pay for the repair and make their car payment. So lenders want to see their buyers in successful situations, which means low-risk vehicles 8 years or younger and 150,000 miles or less."

With prices high, competition at auctions tough and demand from consumers for used cars soaring, Gordon says she is open to considering more super-high-mileage vehicles.

But they would have to pass three tests, said Gordon, whose clean, upscale facility in some ways mimics used-car departments at franchised dealerships.

First, the vehicle must have a clean Carfax report. Next, it has to pass her own inspection. And third, the profit margin has to be there.

"When I am at the auction, I am buying that car the same way [customers] are going to look at it. I am looking at the Carfax. I am looking at service records. I am looking at the body. I am underneath the hood. I am looking for oil leaks," she said. "Having that Carfax data really helps validate my purchase so that it gives me confidence that I am putting into market something that is going to be safe, reliable and respectable."

Gordon has found that buyers of super-high-mile vehicles tend to pay cash and not rely on financial institutions for loans. So an affordable price is extremely critical.

Adding more very-high-mileage vehicles to her lot "would all depend on value. If I could buy it right so that the margins made sense, I would absolutely be open to it. I am a for-profit business. I am not scared to say that. My reputation matters. If it is clean, safe and reliable, I would absolutely give it a chance."