Both the new and used car market is a hot mess right now, and will be for sometime. Just how hot of a mess are we talking? Well, a writer for The Verge managed to sell his 2014 Honda Fit to Carvana sight-unseen for $20,905—$90.20 more than he paid for it brand new off a dealer lot. That’s a mighty caliente market.
How could such an old car possibly be worth more today than when it had 23 miles and still smelled like plastic? How could a company that buys such cars at such high prices before even seeing it double its profits year after year? That’s what Sean Hollister, senior news editor at the Verge, wanted to know. Carvana told Hollister that, like most things in this world, it’s all in the algorithm:
It turns out that the “buying my car sight-unseen” part is actually pretty easy to explain. Carvana’s founding team realized it could never have perfect information — no buyer ever does — yet that doesn’t stop thousands of cars getting sold on the auction block with no test drives and no mechanical inspections either. Somehow, human bidders with relatively little information are still able to come to an agreement on the true price of a car. So Carvana built an algorithm that performs similarly to the human bidders at those kinds of auctions and now trusts it to offer you a guaranteed sum of money and show up with a pre-printed check instead of haggling on the driveway.
The system combs through public databases that record insurance, registration, mileage, accidents, and more before it issues that initial quote — and it doesn’t pay top dollar for any car that’s been in an accident. (Carvana actually gave me the lowest bid of any online service for my wife’s Honda Accord, the opposite of what I saw with my Fit, because it got in a minor fender bender a while back.)
According to Carvana’s Tom Taira, who led product at competitor TrueCar for over a decade, the actual quote you’re seeing primarily revolves around three factors: what the car would sell for on the wholesale market today, what Carvana projects it will be worth, and which cars Carvana needs to stock in its inventory. “The miles on it, the accidents on it, the condition that you’ve reported — all of those things are adjustments,” says Taira. But they’re not at the algorithm’s core.
And it’s that third factor, Taira guesses — the need to fill in holes in Carvana’s own inventory of cars — that might have caused the algorithm to aggressively bid for my seven-year-old blue stick shift Honda Fit with its silver trim and alloy wheels.
While the price Carvana paid for Hollister’s car was fairly high and there are occasional overpayments for vehicles, Carvana released a statement standing by the price. The car-selling app said the $20,905 paid for the little hatchback was aggressive, but not overly so and that it expects to make at least a slim margin on the vehicle. Even after transportation to another state, taxes, repairs and any maintenance, Carvana is still planning on making money on a $20,905 seven-year-old vehicle. Hollister’s trick to snagging such a high price was constantly checking multiple used car bidding apps and sites for the best offer. When he spotted a remarkably good price, he went for it.
Carvana told Hollister that not all customers should expect such luck, especially after the market rights itself. When that will happen is anyone’s guess. Used car prices are bananas right now. The average price of a used car in December was $27,500 as the ongoing chip shortage is driving people who might normally opt for a new vehicle into the used market. In December 2021 there were 1.8 million fewer vehicles on dealer lots.
The entire report from the Verge is very interesting and I encourage you to read the whole thing.