Friday, November 20, 2009

Selling and Buying Used Cars (And how I was reminded about taking advantage of low interest rates)

This post briefly documents my used car selling and buying experience and my thought process.


WHY I SOLD THE 2006 BMW 325i
It started near the beginning of October when Hun from ghkim.com told me how he sold the exact same model car as me for a 2005 Toyota Prius. He cited the maintenance costs and gas mileage as the main reasons. I was surprised by him citing maintenance because when I was doing the initial research for the car, the maintenance fees weren't estimated to be that high according to Edmunds.com. They ended up revising the figures to be about double what they initially estimated. I had realized I had made an expensive miscalculation if I planned on driving the car until it died.

The 4 years of full maintenance was scheduled to end November 14, and I didn't want to have to deal with the expensive repair bills and maintenance required, especially since BMWs require specialist hourly fees.

Also, my wife doesn't like it when I drive like a mad man in the car, so it was loosing its driving appeal.

I got it for the chicks, and now that I'm married, it no longer has much of a purpose.


SELLING MY BMW
On about November 12, 2009, I sold my 2006 BMW 325i for $16,200 through Craigslist. The process was pretty nerve racking as I had to deal with multiple buyers with various offers over a 3 - 4 week period. Plus it was a stick shift, and having to deal with the hassle of test-drives wasn't pleasant. Craigslist has a lot of flakes but in the end it ended up giving me $2,000 more than a local dealership was willing to offer me.

If you considered my BMW to be between a Clean and Average condition, then I ended up selling my car about 92.55% of what Edmunds.com listed as a fair market value.


COST OF OWNING THE BMW
I bought the car originally in November 2005 while stationed in Germany. The original price was $26,840. I didn't have to pay any tax, so that's the total price. When I came to California, I had to pay nominal registration fees (about $250), but still no tax.

Also, through USAA, I got a 2% APR loan for about $25,000 of the loan. The total interest ended up being about $1,263.66 and I'm still maintaining the loan because the interest rates are so low.

My parents had given me some money to pay for the car, so I instead invested the money from May 2005 - October 2008 in stocks. In October 2008, I sold the investments and transferred them to Roth IRAs. I made about $5,968.48 from the original investment. . . of course, it has tanked while in my Roth accounts, but I'm not too concerned about that as I'll be able to pull the money out tax free when I retire where they would've recouped most of the losses.

In the end, here are the calculations of the 4 years of ownership. All maintenance and warranty was covered through BMW for the first 4 years:

2006 BMW 325i
Original Price 26840
Sale Price 16200

From Investments
May 05 - Oct 08 $5968.48

2.0% Interest Loan
Interest Cost to date 20091002 1263.66

FINAL COST
Difference $5935.18
Months Owned 48
Cost/Month $123.65

So about $6,000 total cost for 48 months of driving a new 2006 BMW 325i or $123.65/month. Very good :]


DECIDING WHICH USED CAR TO BUY

RELIABILITY
It was a no brainer for me to go for either Honda or Toyota.

SAFETY
I had to do some research on the IIHS website. Toyota Camry 2007 was the first year that Side Air bags were standard where it got pretty much "good" on all measurements. Honda Accords have side airbags being standard beginning in 2005. Side impact scores were pretty bad if they didn't have side air bags.

USED
I didn't want to pay for a new car for a long time.

CONSUMERREPORTS.ORG
I found out that 2007 Toyota Camrys, being the new model year, were actually having average transmission problems and other issues, so I ended up focusing more toward 2006 Honda Accords as the main interest because they were being rated higher in reliability.


2006 Honda Accord
I bid on a 2007 Toyota Camry with 33,000 miles and lost on Ebay for about $12,400, which ended up being a good thing.

I offered and got accepted for a really bad condition 2006 Honda Accord with 50,000 miles for about $9500. I'm glad I didn't go through with it.

Last Monday morning I was going to close on the 2006 Honda Accord for $9,500, but came to think about all the cosmetic damage and how much it would cost. Plus, I was able to find a certified, used 2006 Honda Accord with about 59,000 miles for $11,888, or $2,000 more. I figured, to get a warranty for 100,000 miles and having a car with near perfect condition was a much better bet.

So I went that route and discovered some extra benefits all in the same, long day.

Honda Accord is doing a special financing program where I was able to finance the entire vehicle, including tax, through their 4.9% APR for 60 months. I have cash to be able to purchase the car outright, but if I invest the money instead, and manage to get a 7% after tax return which I think would be easy to get through LendingClub.com & Prosper.com, I'll come out even further out ahead.

The dealer (Honda of Downtown Los Angeles) ended up signing me up for a $550.00 LoJack device at the last second. The value of this is TBD.

I also got to do a down payment of $3,000 through my credit card netting me a $30 cash back and I'm also getting one free oil change ($40 value).


PROJECTED FINAL PRICE CALCULATIONS OVER 5 YEARS

7% Returns:
Cost $13,617.89
$3,000 Cash Back -$30.00
Oil Change -$40.00
$10,617.89 Financed (4.9% APR) $1,316.04
$10,617.89 Invested (7% APR) -$4,274.25

Total $10,589.68


Should I be getting the returns as high as Lending Club is estimating, I think I can get returns in the 12% range after taxes and defaults:

Cost $13,617.89
$3,000 Cash Back -$30.00
Oil Change -$40.00
$10,617.89 Financed (4.9% APR) $1,316.04
$10,617.89 Invested -$8,094.46

Total $6,769.47


Hopefully, I can drive the car until 250,000 (or 16 years!) or when it finally dies. But if I were to sell the car at the depreciation rate that Edmunds.com projects after the 5 years (Final sell price of $7,000), then I could theoretically had made $230!


OVERALL LESSON
Don't forget to take advantage of super low interest rates WHENEVER possible, especially when you have the means to make higher returns investing that same cash elsewhere!!!