Crazy Idea: What if someone offered a return guarantee for private sales?

SmallCheval

I have been kicking around this idea as of late. If a private seller / buyer submits an independent inspection, I think a company could I offer a 30-day, no questions asked return guarantee policy for ~2-4% of the price of the car. The seller could just walk away from the transaction, and I would be responsible for taking the car.

This would be particularly applicable for the many transactions that happen online without the buyer ever getting a chance to conduct a test drive.

I see like Carvana, Vroom, and CarMax, and I believe that the biggest barrier to more peer-to-peer transactions is fear that the buyer is going to get stuck with a lemon. All of those companies offer a return guarantee.

I love any and all feedback! Even if you think this is the worst idea in the universe!

qbrozen

Here is the problem ... with a private transaction, there are no temp tags, so a buyer can't drive a car until they get it titled and plated. Now, if you take it back, you have to pay to transfer the title back to you, pay taxes again, AND have 2 more owners on the carfax. No bueno.

SmallCheval

qbrozen said:

Here is the problem ... with a private transaction, there are no temp tags, so a buyer can't drive a car until they get it titled and plated. Now, if you take it back, you have to pay to transfer the title back to you, pay taxes again, AND have 2 more owners on the carfax. No bueno.

Thank you. That's super helpful, and I had no idea. I know Beepi used to somehow offer this on their private transactions.

oldfarmer50

I’m not sure I understand your idea. Would you offer an independent third party buy back guarantee like an extended warranty? It might give some people peace of mind.

Quite frankly I don’t know how anyone would buy a car sight unseen.

qbrozen

oldfarmer50 said:

Quite frankly I don’t know how anyone would buy a car sight unseen.

SmallCheval

oldfarmer50 said:

I’m not sure I understand your idea. Would you offer an independent third party buy back guarantee like an extended warranty? It might give some people peace of mind.

Quite frankly I don’t know how anyone would buy a car sight unseen.

Yea, that's effectively it. So many more people are buying online now, and with a lot of people buying from places like Carvana with really high prices, I have been playing around with the idea of how you could offer the same buyback guarantee while still allowing the customer to have paid much less than they would've with an online dealer.

A lot of folks today lean on independent inspections before confirming an online purchase, but I feel like a buyback guarantee combined with this could add another layer of peace of mind.

I think there's a market for the product. The bigger issue than even the return rate (which according to Carvana and Vroom is actually quite low) is managing the logistics that @qbrozen pointed out.

Any other thoughts (including negative ones!) are always welcome.

qbrozen

SmallCheval said:

qbrozen said:

Here is the problem ... with a private transaction, there are no temp tags, so a buyer can't drive a car until they get it titled and plated. Now, if you take it back, you have to pay to transfer the title back to you, pay taxes again, AND have 2 more owners on the carfax. No bueno.

Thank you. That's super helpful, and I had no idea. I know Beepi used to somehow offer this on their private transactions.

Possibly Beepi had temp tags and managed the title transfer, which they could postpone until after the trial period. I believe you can obtain temp tags in some states yourself, but I couldn't tell you much about it, and it would obviously then limit the audience.

Could be a market for a service that acted like Carvana/Vroom but worked private parties. So the service takes the pics, makes the ad, handles the paperwork, processes payments, etc. I know I wouldn't want to be that service, though. Could be a legal nightmare. For example, I can tell you that, in NJ, you have consumer protection laws supporting you when buying from a dealer, even if the car is used, but those laws don't pertain to private sales. https://www.nolo.com/legal-encyclopedia/new-jersey-lemon-law-used-cars.html

oldfarmer50

qbrozen said:

oldfarmer50 said:

Quite frankly I don’t know how anyone would buy a car sight unseen.

You’re much braver than me.

oldfarmer50

SmallCheval said:

oldfarmer50 said:

I’m not sure I understand your idea. Would you offer an independent third party buy back guarantee like an extended warranty? It might give some people peace of mind.

Quite frankly I don’t know how anyone would buy a car sight unseen.

Yea, that's effectively it. So many more people are buying online now, and with a lot of people buying from places like Carvana with really high prices, I have been playing around with the idea of how you could offer the same buyback guarantee while still allowing the customer to have paid much less than they would've with an online dealer.

A lot of folks today lean on independent inspections before confirming an online purchase, but I feel like a buyback guarantee combined with this could add another layer of peace of mind.

I think there's a market for the product. The bigger issue than even the return rate (which according to Carvana and Vroom is actually quite low) is managing the logistics that @qbrozen pointed out.

Any other thoughts (including negative ones!) are always welcome.

I assume you have researched Carvana’s return rate and would let that guide you in structuring a fee. Like any insurance company you’d have to insure adequate capitalization to cover claims. Do you have any actuarial or finance experience? Then there’s the complicating factor of model reliability differences which might make insuring some cars risky.

xwesx

I was going to mention the same thing that Q brought up just above.... You really need to do a lot of research on this and crunch some numbers to guide the fee. The risk exposure certainly goes down as you move forward on this and get some vehicles successfully out of the guarantee period, but, in the beginning, you have substantial exposure.

For example, you suggested 2-4%.... so, let's say the transaction is $20K. You pull a scant $800 at 4%, which is great if that car runs through the 30-day window (or whatever period, but I'd certainly suggest shorter is better) with no issues, but really bad if you must turn around and buy it back for $20K. So, is $800 a reasonable fee, or should your overhead be higher (and suddenly Vroom and Carvana are not looking so over-priced!)? You would need 25 successful guarantee periods to cover the price of one buyout, and, in that scenario, you still aren't making any money (unless your investments with the fees during that period really paid off!).

Next... there can be two issues with private party sales across state lines: 1., many financing institutions won't go private party (so cash-in-hand sales only), and 2., the paperwork is more complicated for inter-state sales (which scares both buyers and sellers away from the process). In this case, you may need to have a dealer's license and act more as a broker where you're facilitating the sale. Your time investment goes up, which harkens back to the fee... is it the "right" amount? Hard to say....

If your fee is small, it encourages people to buy in.... if it is high enough, it really gets people to thinking about using it! So, where is that sweet spot?

I think that without a lot of capital to back up the liability, you're unlikely to get off the ground with this. It could be an excellent service, but certainly not a plan for the risk-averse (or even moderate....). Also consider that any money you "earn" on the guarantee is not earned revenue until the guarantee expires. So, without the capital backing it, this may turn into an unintentional ponzi scheme.

xwesx

I was just thinking about this again, and there's another aspect that you should consider: PPI. If you are going to put your neck out for these vehicles, you will need to have confidence that things are in order on it. So, you're likely going to need to form a strong relationship with a PPI provider and roll that cost into your fee.

I just purchased a (slightly) used car in New York, and the paperwork disclosures noted that, by law, all vehicles come with a 30-day guarantee relating to the fitness of the vehicle. I did not read closely enough to determine if that is dealer-sold only or all sales, but something to consider: Laws vary by state!

SmallCheval

xwesx said:

I was just thinking about this again, and there's another aspect that you should consider: PPI. If you are going to put your neck out for these vehicles, you will need to have confidence that things are in order on it. So, you're likely going to need to form a strong relationship with a PPI provider and roll that cost into your fee.

I just purchased a (slightly) used car in New York, and the paperwork disclosures noted that, by law, all vehicles come with a 30-day guarantee relating to the fitness of the vehicle. I did not read closely enough to determine if that is dealer-sold only or all sales, but something to consider: Laws vary by state!

tl;dr: You guys are great. Thank you for the feedback.

First of all, I want to thank all of the users, who have commented on this thread. I have started multiple businesses, and I often try to get feedback right out of the gates from experts / passionate users in a given field, and you all have been hands-down the most genuine and thoughtful. The internet can be a dark place, but it also can be such a powerful breeding ground for creating and learning (and being humbled!).

To the actuarial questions, these are spot on. It's really entirely a risk-based model. Everything depends on the balance of what you can charge, what your return incidence rate is, and how well you can liquidate (and just the sheer logistics of vehicle sales, which you all have astutely pointed out). I have done a lot of modeling, and here is what I'm finding:

Return incidence rates are quoted by a Vroom executive as "low single digits." An executive at Carvana quotes at "mid-to-high single digits." Beepi claimed only 3% (but I take them with a grain of salt, since they flamed out so badly). In my models, that range of numbers works pretty well. That then turns us to what has rightfully been called out as my biggest bogey: liquidation costs / value.

I want to test this concept, and I think that it can be done *relatively* low cost by assuming that I would shop the returned vehicle's information around for the best trade deal I can get, guide the returner to that dealer, and then mail them a check for the difference. I'm assuming that I will lose 30% of the value of a returned car with this approach. That may be too friendly to myself (50% may be more likely). If there were scale to the concept, I would imagine that I would establish myself as an e-dealer with regional hubs, so I could process the car, and then try to resell it at or above a private party price. That would require a lot more overhead, but again, it would likely significantly reduce the liquidation exposure.

Basically, if I can get confidence on the actual logistics of the offering, I think there could be real value there. Is it an absolutely enormous business? I mean, maybe one day, but I think to start, for those brave souls (and they're growing!), who are comfortable buying sight unseen, I think that if this offering were packaged with a PPI (and the vehicle would absolutely have to first pass a PPI to be eligible), it could be something that folks want. The limited surveying I've done so far has been really positive.

Anyway, thank you all again so much, and if you have more thoughts / questions / suggestions / reasons for me to question myself, I absolutely want to here them!!

xwesx

I agree that there could be real value in this. If you can develop a model that returns sellers better-than-trade-in on their cars and buyers less-than-retail on their purchases, with a similar peace of mind of a dealer sale (Don't laugh at me... Well, okay, a reputable one!), you could have a real winner. With less overhead and maybe even a smaller margin per unit, it is likely doable and possibly even lucrative.

For the pricing model, I don't know whether the answer is a seller fee or a buyer fee, but I have a feeling that the best approach is for each to give a little, because they are both gaining equal benefit.