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Automotive Legal Information - March 17, 2004


Vehicle "Value": What Is It And Where Does It Come From?
By E. L. Eversman, Esq.

"Value" is a word that is tossed around constantly in modern business practices, but it is the word that drives the new and used vehicle business (no pun intended).

Where does "value" come from?

Initially, a vehicle's value is established by the manufacturer. Auto makers set a manufacturer's suggested retail price ("MSRP") for any given product. Most of us are familiar with the "window sticker" which identifies the base value of the vehicle, lists the included options and their costs, and sets a "sticker price". In theory, the MSRP includes a profit for the dealer. What the window sticker does not disclose, however, is the actual manufacturing cost of each vehicle and how much of that built-in price is the auto maker's profit.

Yet, while auto makers can artificially set an MSRP, they cannot artificially create demand for their products. If lack of demand shows that the price is set too high, manufacturers can lower the price. Or they can offer rebates and incentives to purchase - which is a more diplomatic way of lowering the true cost to the buyer without blatantly advertising that the price is being reduced. Have you ever noticed that manufacturer rebates never seem to apply to popular vehicles? When was the last time General Motors offered a rebate on a new Corvette?

Fair market value

Once we pass the manufacturer's set price for a car, vehicle values are derived the old fashioned way - by sales in the market place. "Fair market value" is a phrase we often hear, but what does it really mean? According to Merriam-Webster's Dictionary of Law, 1996, which can be searched online at Findlaw.com (access through the Research topic at the bottom of the home page), fair market value is "a price at which buyers and sellers both having reasonable knowledge of the property and being under no compulsion are willing to do business." My handy, hardbound edition of Black's Law Dictionary (6th Edition, 1990) provides a lengthier, and more informative definition. Black's tells us that fair market value is: "The amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts." The definition goes on to say that: "Usually the fair market price will be the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition." Black's also says that some terms which can be used interchangeably with "fair market value" are actual value, cash market value, fair cash market value, fair cash value, reasonable market value, and true cash value.

What the dictionary definitions do not tell you, however, is that fair market value has a very specific legal application. It is used to describe a market open to everyone, which we consider to be the retail market. In other words, it involves sales to the ultimate consumer, as opposed to sales to middlemen.

Until the advent of eBay Motors, sales between retail customers were a tiny fraction of the overall vehicle market. With eBay's online vehicle auctions, retail customers now have the ability to sell their individual vehicles to the entire nation of other retail customers. But as with any other transaction, it is important to find out all of the information about the car you are considering before purchasing online. What you may consider important information may be something the seller has no intention of disclosing.

Willing buyer, willing seller and all the relevant facts

Once the market is identified, the next thing to figure out is who the parties are. The buyer and seller must both be 1) willing, 2) not under compulsion, and 3) must have reasonable knowledge, 4) of the relevant facts. The willing part is easy to understand - they each must want to engage in the transaction. But they also must not be under compulsion. That means that neither has to be under stress to buy or sell. If the seller has to sell his car today to raise cash to make his house payment, he doesn't have the ability to negotiate the highest price. The same is true if the buyer is under pressure to purchase a particular car today, because his sister will return tomorrow and discover that he has totaled her car. In these situations the law recognizes that one party has the other at a disadvantage, and, therefore, the transaction is not reflective of the true market, because it is not fair. (Remember the phrase is fair market value.)

The next two elements of the definition deal with knowledge. Both parties must have reasonable knowledge of the relevant facts. Relevant facts are those directly impacting the transaction. Reasonable knowledge is what an ordinary person in the same position would understand. So, if the car you are about to buy was originally bought back by the manufacturer as a lemon, that is the type of information most people would consider relevant and important to know before deciding whether to pay the asking price.

Wholesale market value

The definition of fair wholesale market value is similar to retail market value, except that the market is different and the level of understanding constituting reasonable knowledge is higher. The wholesale market consists of people who are purchasing with the intent to resell the product to someone else for a higher price. Access to the wholesale market is typically restricted, and state regulations limit wholesale auctions and sales to those licensed by the state to engage in vehicle resale. The participants in the vehicle wholesale market are usually manufacturers, dealers, lessors, rental companies, and brokers.

The advantage of trading in this market is that there is almost always an immediate buyer for the vehicles. Unlike retail sales, where so much is contingent upon a person's preferences, interest, and ability to secure financing, dealers know that they have a consistent location for selling excess or inappropriate inventory and a ready-made source for purchasing inventory.

Trade-in value

Trade-in value is the amount a dealer will offer on a vehicle as part of a different vehicle purchase. Many people mistakenly assume that trade-in value and wholesale value are the same. That is not true. If the dealer is astute, trade-in value will typically be less than the wholesale price. Here is the reason why.

Unlike years ago, when a dealer takes a car in trade, the dealer has no intention of stocking that vehicle as inventory to sell to another retail customer. The market practice is to immediately send the trade vehicle off to a wholesale auction for liquidation. This is particularly true in high-line, new vehicle franchises. Mercedes-Benz dealers do not usually take a four year old Mercedes in trade on a new model, detail it, and park it out front for sale to another retail customer. The trade occasionally may not be sent directly to the auction, but the common practice is to send it to the wholesale market. As a result, to make a profit on the transaction, the trade-in price the dealer offers to you must be lower than the price it will realize at the wholesale auction.

Because of disclosure and liability issues, dealers are extremely wary of stocking vehicles which have been damaged and repaired. Sometimes, dealers take the extreme precaution of refusing to be included in the chain of title on any vehicle which has been damaged and repaired and simply will not take the vehicle in trade or as a stand alone purchase.

The bottom line

With all of this information, the next time you purchase a vehicle you will understand why the dealer's trade-in offer is so much less than any value you looked up online. Remember that you need to compare apples with apples, not oranges. If you think you can sell your vehicle for the value you found online, you will need to put a "for sale" sign in the window of your car or list it on eBay. For some people, this will be the way to ensure you get every possible dollar for your car. For others, they will forego some portion of the value to avoid the headache involved with selling your own car.

E. L. Eversman

The information provided in this column is for information purposes only and should not be construed as legal advice. You should always consult an attorney licensed to practice in your Country, State, and/or Territory as laws vary from Country to Country, State to State, and Territory to Territory. The author is delighted to share information but cannot be responsible for damage or adversity encountered by reliance upon that information and urges you to consult with local counsel.

The above article is provided for the interest and entertainment of our visitors. The views expressed in this article are only those of the author, who is solely responsible for the content. AutoGuide.net does not endorse any of these views, and is not to be held responsible for any of the content provided in the above article.

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