Buying and selling used cars for profit in California?
July 28, 2010 7:11 AM   Subscribe

Buying and selling used cars for profit in California?

The job market is mediocre, and I doubt I'll be able to get a job between the end of summer quarter and before fall quarter starts. Therefore, I will be my own boss and start buying and selling used cars for profit. I'm not a master mechanic, but I know a handful of things about cars. I know how to detail a car, do preventative maintenance, and I have a couple of friends who are mechanics if I am ever in a pinch.

So anyways... I don't have a whole lot of money to start out with. I have about $1200 max, and that's including borrowed money from my credit card. Preferably, I would like to start out around $500, but I'm not sure how realistic that is.

What cars would be in high-demand that's around the $500-$1200 range? I'm thinking small imports like Camry, Corolla, Civic, Accord, Sentra, Tercel, et cetera. Plus, those are easy to work on and parts are relatively cheap for them (at least, that's what my assumption is).

I've never sold a car before either. So if I recall correctly, the most important pieces of paper during the transaction is the bill of sale and the pink slip. But how do you give someone a pink slip if for example, you bought the car and meet the opportunity to sell it soon after? How long does it take for the DMV to issue a new pink slip?

I think I've asked all the main questions. I will post more if I feel like I forgot any. Any additional inputs or advice is greatly appreciated!
posted by RaDeuX to Work & Money (16 answers total) 1 user marked this as a favorite
Have you looked into what permits are required and what environmental regulations pertain to selling used cars in CA?
posted by dfriedman at 7:24 AM on July 28, 2010

The question you seem to have missed is "If this was an easy way to make money, why isn't everyone doing it?"

The answer is "Because it isn't an easy way to make money."

You really, really don't seem to have thought this through. People don't willingly sell vehicles at a loss. Consumers trade in vehicles when they buy new ones, not because it's a great price--because it's usually a terrible price--but because they don't have to deal with the hassle of disposing of their old vehicle. The dealer won't pay market price for the car because they have costs and need to make a profit on that transaction too.

Then there's the actual logistics of the thing. Borrowing money from a credit card for a business venture is insane. And you're completely ignoring the issue of sales tax, which you'll probably have to pay unless you register as a dealer, which isn't free. Then you're going to need some way of getting people to buy your vehicles, which means advertising, which means more cost.

But if you're trying to resell vehicles at a profit, you need to look at auto auctions. That's pretty much the only place you can regularly get resellable vehicles at a price which makes the idea economically viable.

My advice? If what you want to do is to start your own business, then for the love of all that's holy, come up with another idea. But if what you want to do is sell cars, get a job at a dealership. They know what they're doing.
posted by valkyryn at 7:31 AM on July 28, 2010 [1 favorite]

Response by poster: @dfriedman: Apparently, I can only sell 5 cars a year in my own name. However, I could always use other people's names under the title, so I'm not all too concerned about that.

@valkyryn: Because most people know next to nothing about cars? Even the car dealers don't know a whole lot (depending on which ones, of course) about what they're trying to sell.

I'm not concerned about borrowing money from my credit card account, since I can always pay the monthly minimum amount until I can actually sell the vehicle. That's partly the reason why I'd like to stick with a car that's in high demand so I know I can sell it without a lot of downtime.

I've come up with a couple ideas before. I was thinking about making apps for the iPhone. I learned the basic Objective-C and Cocoa touch language, but the app market is already too saturated and virtually everything has already been done. After I'm done with this quarter's java class, I might take up Android app development since it's open source. So yes, I have other ideas, but the whole car dealing thing sounds like the better idea as of right now.
posted by RaDeuX at 7:43 AM on July 28, 2010

You aren't listening.

Say you borrow $1000 from a credit card as a cash advance. Right off the bat, you're looking at a charge--usually 3-5%--so you've got costs of about $40. The finance charge on a $1000 balance is going to be about $12 a month, so if you make minimum payments for three months, you've got additional costs of $36, for a total of $76.

That's 7.6% of your total cost, so you unless you can sell the vehicle for at least 107.6% of what you paid for it, you're actually losing money. If you can sell it for 110% of the purchase price, which is a fantastic rate of return, you were only looking to make $100 to begin with. Now you're down to $24, or 2.4%. As municipal bonds currently have yields in the neighborhood of 5%, you'd be better off just buying one of those and holding it to maturity.

If you still think this is a good idea, your understanding of how business works on an economic level needs a lot more work than I thought.

Again, for the record, financing business expenses with a credit card is a horrible idea unless you can pay it off, in full, every month.
posted by valkyryn at 7:56 AM on July 28, 2010 [1 favorite]

Response by poster: @Valkyryn: Frankly you've misread. I said that I have at last $500 on my own account which doesn't include any money from the credit card account. I think you're also forgetting the fact that people are rather impatient when it comes to selling their vehicle. I've already found a 1993 Civic for $300 that runs perfectly fine. It just needs a coolant hose and a CV boot. So I'll buy that, fix it up, sell it for $1.2k for more, and I'm gold. Also, I'm only willing to take money out of the credit card if I know I got myself into a great deal.
posted by RaDeuX at 8:03 AM on July 28, 2010

You will not make money this way. Period. Of the top of my head, I know three different people who are car nerds who have tried to find niche markets where they can make money flipping cars and it didn't work for any of them. Well, one guy who was importing old european sports cars and getting them licensed for american roads made some money for a while, but then went spectacularly bankrupt.

Regardless of all this financing silliness, with cars in that price range there is a very high probability that you'll lose your whole investment when a transmission goes bad on your first drive.

FWIW, between the two of us my dad and I have bought and sold 70 cars. We have made money only a handful of times in spite of the fact that we're pretty savvy about the whole buying and selling process and cars usually leave our care in better shape than they started.

Learning to accept and move on from bad ideas is a key to success in business.
posted by pjaust at 8:08 AM on July 28, 2010

And if you've never sold a car before, you're probably not in the position to properly evaluate a car's mechanical condition. Factor in a $100 pre-purchase inspection before each purchase (plus $100 for each dead-end).
posted by pjaust at 8:10 AM on July 28, 2010

Are there costs involved in registering each car when you've bought them? What about insurance costs?

And though you have some experience doing preventive maintenance, won't there be costs for inspecting the cars you want to buy? For instance, how do you know that the 1993 Civic you have your eye on only needs a coolant hose and a CV boot? It's very easy to buy a car that needs a lot of work if you don't know what you're doing, and sellers -- eager, as you say, to get rid of their car -- aren't known for being totally upfront about this stuff.
posted by gabrielsamoza at 8:12 AM on July 28, 2010

$1200 cars? The Bottle Rockets were singing about thousand dollar cars fifteen years ago. Adjust for inflation and the song goes, "$1200 car it ain't worth nothin', $1200 car it ain't worth shit. Might as well take your $1200 and set fire to it." With that kind of money, you're going to be buying clunkers - not "ask a buddy to look it over" clunkers, more like "call the tow truck, it only made it two blocks" clunkers.

What you're proposing is the equivalent of "I think I could start a taco stand using dumpster-diving meat. Oh, and I only know how to make mac'n'cheese." Don't do this.
posted by notsnot at 8:21 AM on July 28, 2010 [3 favorites]

My first thought was valkyryn said. If this is such an easy way to make money, why isn't everyone doing it? Sure, most people know next to nothing about cars. I'm definitely one of those people. However, how much about cars do you know? More than 99% of people? 99.9% of people? Some people have worked as mechanics for more than 20 years. Your friends are mechanics. Why don't they do this? I'm guessing that it's because they would make more money as mechanics which makes me think this is not a smart idea.

Also, as I mentioned, I recognize that I know next to nothing about cars. Most people know next to nothing about cars. That's why most people buy cars from dealers or people they know. I don't have a lot of money which is why it's more important for me to spend what little money I have wisely and buy a car with a warranty from a dealer than some random guy on craigslist who has "a couple of friends who are mechanics."

I don't think this is a good idea. It sounds like you're pretty stubborn and are planning to do it anyway so I would try to determine why someone should buy a car from you. Price isn't the only reason why people decide to buy a car from one person instead of another.
posted by kat518 at 8:47 AM on July 28, 2010

In business, you want to find partners who can fill in for the skills or attributes you lack. You have lots of time, an ability to detail cars, and can probably learn what cars will sell easiest.

What you lack is serious mechanical ability and the money to do this.

Go find yourself a mechanic and sell that person on becoming a partner. You will find a handful of cars that look like they might be diamonds in the rough. The mechanic will look them over to make sure they aren't paste, and make whatever simple fixes will significantly increase the value for resale.

Then find yourself a partner with $20,000 or more to invest, and sell that person on the genius of your idea and on your and your mechanic partner's skills. Figure out what the split is going to be and what happens if you lose money and get that in writing so there is no confusion if things go south.

Don't use your credit card for this. Don't use your last few hundred dollars for this. Good luck.
posted by willnot at 9:18 AM on July 28, 2010

Also, if you use other people's names on the titles to circumvent the limit, you're committing fraud. So not worth it for the couple of bucks you're going to work VERY hard to possibly earn.
posted by hwyengr at 9:50 AM on July 28, 2010

My dad did something similar in college in the 70s. Within months of buying a Porsche he found it was costing him an arm and a leg in parts to keep it running, so he bought a parts car he could pick from. Soon he had a couple parts cars and was selling Porsche parts on the side. Did he make much money? No, not really, but it did allow him to keep a Porsche he couldn't have otherwise afford to maintain.

To me, it sounds like the overhead of California law (smog, inspection, registration, insurance, etc) will likely destroy your profit margin. I agree with Jamaro, detailing cars may be a better way to earn some cash. Low overhead + labor intensive work is low-risk formula for for making cash on the side. Flyer cars at Autozone, advertise on craiglist or even find a used car dealer. There's always demand for good detail work, especially at (slightly) sub-market prices.
posted by notpeter at 11:54 AM on July 28, 2010

A friend of mine did something similar to supplement his income. His approach was different, though.

He bought cars for $50-$100 each at auction, fixed them by himself and with a friend who has a car dealer's license, and would resell them for $1,000. About 90% of the repairs that he did were all blown head gaskets. Most of the cars were small 80s-90s American and Japanese cars.

He made great money, since his labor was free and the head gaskets (and the other stuff you replace while you're in there) usually only ran him about $150 per car.

However, he stopped doing this. Why? Too much customer service. He had too many people call him to complain, wanting their money back, because the cars frequently had other problems beyond those that he fixed. Sometimes their complaints were valid, sometimes they weren't. "My 1.2 liter Geo Metro can't do 65 up the hill when I have 2 people in it," for example.

Are you prepared to deal with the headache of people being unhappy with their purchases from you?
posted by MonsieurBon at 12:22 PM on July 28, 2010

The people responding with "why isn't everyone doing it?" haven't bought or sold cars recently. There's a thriving market of people who buy cars cheap, fix them up, and flip them. I'd argue that most of the used cars people buy in the US have been flipped at an auction or through a 3rd party before the sale.

Certainly you know about used car dealers, and you've heard of the brokers who exist in various niches and certainly do hang out on Craigslist. I personally bought a car from one of these small-time dealers doing almost exactly what you describe off of Craigslist a little over a year ago.

The guy who flipped the car to me? Well, let's just say he was done flipping. Literally. He seems to have had a legit operation -- a current dealers' license since he had been doing more than five a year, some storage space -- but he was losing money, had closed down his operations, and was planning on moving out of the area. He wasn't able to turn the cars over fast enough, and he was getting desperate to get out. In the case of my car, it's clear that he started advertising it for thousands of dollars more than I bought it for, and finally "settled" on my e-mail offer when he got close to the edge -- I didn't get a call from him for a couple of weeks after I sent him a note, and he offered it to me at a discount over the price he had listed on Craigslist just to clear out this last bit of inventory. He had been showing it and showing it, wasting his time, but nobody bit. This wasn't some sort of exotic car, either -- it was a perfectly normal Volvo with no major problems. To him, it was a doorstop, a paperweight that was getting in his way, wasting his time, and not making him any money. (Don't worry about my side of the story -- it's been a reliable family wagon that I got at a great price.)

If you buy a car as a private party in CA and want to flip it, you're in a race. jamaro's post is pivotal: if you don't flip it fast enough, you're on the hook for the registration fees and for smog testing. That can easily cost as much as you just spent on a $300 car. And there's the risk that, for older cars, it won't smog again, and you're on the hook for a smog repair before you can sell it. And then, there's the chance that even after buying the car, parts to fix it, registering it, smogging it, and getting a smog repair, that you just won't be able to sell the thing until you drop the price to what you've put into it. And then there's the risk that the car dies on the person who just bought it, and it becomes a nightmare for both parties.

So, that's the reason why it may not be a good idea: there's plenty of risks. If you lay out money on a beater and the sale doesn't happen right away or problems crop up, you could be stuck with all of your capital in one car or a couple of cars that you just can't get rid of, either because of problems or at the whim of the market. You can end up with less money than you started with even if you do everything right.

The larger players are able to buy lots and lots of cars and have enough postings or foot traffic to make turnover consistent, and also have the ability to re-flip the cars at little to no loss at auctions if it just doesn't sell from listings or on the lot. They have risk, but it's managed, diversified risk. When you're working at a smaller scale, a single car purchase can bomb you completely out of the game.

If you can't take the risk of ending up with less money than you started with, get a job with a detailer or used car dealer and let *them* take that risk. If you're rarin' to flip a few cars, adjust your expectations, read as much as you can on the DMV web site and on Craigslist, go for it, and either pocket the money or learn from your mistakes.
posted by eschatfische at 1:25 PM on July 28, 2010

I think the exception to the rule of not getting into the beater-car-flipping business (which is correct: don't do it, you will lose money and have no fun) is if you can specialize. Generic econobox cars -- what you are considering buying and selling -- are totally fungible. A crappy old Corolla can be replaced with a crappy Civic, and both of those can be swapped for a Sentra. There will be other people who have better financing, access to better prices, or in house skills and labor that you don't have.

However, if you instead become a specialist in a rare make and/or model (eg boxy Volvos, diesel Benzes, a particular variety of Porsches, etc), then you are no longer dealing with fungible items. The market is much clearer, and it becomes much simpler to buy low, do the needed value-added detailing and repairs, and sell high. This doesn't take a lot more money than you have, but it does take a lot of monomaniacal knowledge -- you need to know every detail of changes through model years, how to spot non-factory parts, and how to access buyers who are looking for that exact model.
posted by Forktine at 5:27 PM on July 28, 2010

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