When you're shopping for a used car you could easily be tempted by luxury models you couldn’t afford if they are new, but have you ever wondered why are used luxury vehicles so cheap, compared to how expensive they were when they were new?
Used luxury vehicles are cheap because they depreciate quickly, they are expensive to run and maintain, they often have a lot of features that can go wrong over time, and the sort of people who can afford to buy them new are not going to buy them used.
How "cheap" are used luxury cars really?
Let's just qualify something here. When I refer to used luxury cars as being cheap, I don’t mean they don’t cost much. They are still relatively costly used vehicles, but they look very cheap when you compare their used values to how much they cost to buy brand new only a few years earlier.
Of course, not all luxury vehicles see their price tank as soon as they are driven away from the showroom and suddenly become affordable for everyone. Some luxury vehicles, especially compact and midsize SUVs, hold their values relatively well. On the other hand, models like large luxury sedans can be picked up for really low prices once they have a few years and a few miles on them.
A couple of great examples are the BMW 7 Series and the Audi A8. A new 7 Series costs from just under $90,000, but you can easily pick up a used three-year-old example with less than 30k miles on the odometer for a good deal less than $30,000. Likewise, the most affordable new Audi A8 costs around $84,000, but a three-year-old model can easily be found for less than $35,000. When it comes to the issue of car depreciation, those numbers really do take a bit of beating.
Used luxury prices vs brand new non-luxury models?
Ok, so we've established we can get a three-year-old BMW 7 Series with below average miles for less than $30,000, so what could you get brand new for that sort of money. Well, you could get a mid-range Ford Fusion or Toyota Camry, or an entry-level Chevy Impala for that sort of money, so what would you choose? Be honest, a 7 Series or an A8 that's only just out of its manufacturer warranty is going to look a lot better outside your house or in the parking lot at work, isn’t it?
By the way, if you look for a three-year-old version of the Fusion you'll probably be looking at paying around $15,000 for one with below-average miles, which is depreciation of about 40% from new. Over the same period the BMW 7 Series will have lost around 70% of its value, which is why it appears so cheap to buy used.
Luxury customers don’t want used luxury cars: a true story
A few months after I started as a sales exec in the retail auto business I was sent to a weekend used vehicle sales event by the dealer group I was working for. The group had around 20 Land Rover dealerships, and it had been decided that they would all send their used Range Rovers to one location for a special weekend event. I was new so I didn’t think anything of it at first, but when I got there and saw there were around 80 Range Rovers for sale I realized the group had a problem with used Range Rovers.
A few years earlier, when the latest generation was launched, the dealers had waiting lists and were selling these vehicles at full retail. Nobody was discounting them at that time because they didn’t have to, and sales execs were getting very small commissions on them because the group decided the vehicles were selling themselves. That certainly wasn't the case a few years later when the novelty had worn off, supply was plentiful, and big discounts were now commonplace.
The big problem was that the kind of buyer who could afford to buy a brand new Range Rover wasn't interested in buying a used model. When the time came for a change they'd just buy another new one, and this created a large inventory of expensive used models those buyers no longer wanted, and less affluent customers couldn’t yet afford. To say they were hard to sell would be an understatement, and we started to dread selling a new Range Rover if it meant we'd be getting a used one back as a trade-in.
Losing money – and I mean big money – became a common occurrence with used Range Rovers, especially ex-demos and those only a couple of years old. The only way to sell them was to sell them cheap, and I mean so cheap that they became affordable to an entirely new level of buyer who couldn’t dream of buying a brand new one.
Cheap to buy but not cheap to own
A $90,000 car for around $28,000 after just three years has to be tempting, right? Of course, it is, and it really is a lot of car for the money. The problem is, it doesn’t matter how much you paid for it used, it still costs luxury car money to run, maintain and insure. Actually, the used one costs more in some ways because you no longer have the cover and peace of mind of that all-important manufacturer warranty, and the 48-month service is probably the most expensive one of all.
A new exhaust, catalytic converter, brakes or a set of tires don’t cost any less because the car is three or more years old and hasn't cost $90k to buy. You may have got a great deal buying your used luxury model, but you’re still going to have to have pockets as deep as the people who can afford these cars brand new when it comes time to start fixing and replacing things.
Some luxury vehicles cost more to run and maintain than others because they’re more reliable, of course, but there's no such thing as a luxury car that's cheap to maintain and run.
A common misconception
It's true that brands like BMW, Audi, Lexus and Mercedes have strong reputations for reliability, and on the whole, it's for good reason. However, a lot of that comes from models they produce in relatively large numbers over long periods of time that are very profitable and get lots of feedback from customers so they can, therefore, be continually improved.
Models like the 7 Series, S Class and A8 don’t sell in big numbers, and they're positively bursting with the very latest cutting-edge technology and features at the time they are produced. A lot of this tech and these features filter down into more affordable models over time, but these big, super-expensive models are basically used as test-beds. Those who buy them new probably won’t experience too many issues because they are new and covered by a warranty, but as time goes by some of these features and systems inevitably begin to fail.
You might be prepared to leave heated and cooled seats that don’t work properly if they're going to cost you an arm and a leg to get fixed, but if an electric roof or the suspension fails it's going to cost a small fortune to get fixed, and you won’t be able to just ignore it.
Should you just avoid used luxury "bargains" then?
I'm certainly not going to tell you to avoid used luxury vehicles that represent a massive saving at all costs, but you really do need to take care. You should always take great care when buying any used vehicle, of course, but with one of these, you really do need to do your research before buying.
Read all about the particular model you’re looking at, and I'm not just talking about the make and model. Look into the specific model year and generation of the vehicle you’re interested in, and find out what the common problems are, how to spot them, and how much they will cost to get fixed.
In some cases, you could get an absolutely incredible bargain if there's a problem that seems serious that you learn can be relatively affordable to fix. I knew someone who once bought a Porsche Boxster S for next to nothing that had a dodgy transmission. The price was so low it was too good to miss, but replacing the transmission would have cost double what the seller was asking for the car.
The guy who bought the Porsche knew there was a good chance the problem could be fixed for no more than a couple of hundred dollars if it was what he thought it was. And even if it wasn't and it needed completely replacing, he would have been able to sell the Porsche on again without losing money and he could even have made a profit breaking it for parts. In the end, it only needed stripping down, a small fix and then reassembling, so he got a very nice Porsche for the price of an aging Ford Fiesta.
Let's just say that all that glitters isn’t gold, and a vehicle that was very expensive when it was new that's now selling for a knock-down bargain price might not be the bargain it first appears. Of course, you can also end up with a lemon when you pay considerably less for a non-luxury used vehicle, but the risk isn’t anywhere near as big.