July 14, 2009
By Paul Williams
Something that seems strange at first glance is that cars costing $100,000 or more new, are frequently found six or seven years later for $9,995 (or best offer). This is far beyond the normal depreciation for many mainstream vehicles. You’ll even find Rolls-Royces for under $20,000 if you look around. The irony is that a six-year old Honda Accord can retail for $20,000 and it only cost $30,000 new!
Check around and you can buy 5 Series and 7 Series BMWs for under $10,000, six-year old Mercedes-Benz E320s (with Navigation!) for $14,998, or a 2001 Audi A8 (also with Navigation) for $12,450. It’s not just vehicles from the German manufacturers that depreciate so dramatically, as you can have your pick of late-model Jaguars for under $15,000 (actually, under $10,000 if you’ll take a 2001 model), Cadillacs from 2002-2004 can be bought for $8,995 while Lexus models only cost two or three thousand more for the same vintage. And if you’d like some extra power with your luxury ride, you could consider a Bentley Turbo R for the same price as a new Hyundai Sonata. That would make quite an impression in the staff parking lot…
What gives? These vehicles supposedly represent the pinnacle of automotive quality, engineering and style. But if they are so good, why don’t they hold their value into the future? Are these genuine bargains, or what?
Well, yes and no. Indeed you can get a lot of vehicle for the money, but to really answer that question you have to look at the life cycle of a luxury car. Typically they are leased when new by wealthy individuals who hold onto them for two to four years. Even though the lease payment could be $1,500-2,000 per month for such a vehicle (say $60,000 for a three-year lease), this is a far more economical proposition than paying cash for a $150,000 car that may have a trade-in (wholesale value) of $50,000 after three years.
When such a vehicle is returned upon the completion of the lease, the manufacturer typically services, details and extends its warranty (for its Certified or Premium “pre-owned” vehicle programme), so the second owner (likely also leasing) will have the benefit of a warranty for the duration of his or her tenure with the car. If the timing is right, the model is still current so it still looks “new,” but after this second lease (or purchase), the warranty is over, the vehicle is six-years old, and even though it may be in wonderful condition, it will likely be traded in and purchased by a wholesaler for a fraction of its original cost. Then it hits the used car lots.