How to Buy a Used Car

I didn’t buy my first car until my early 30’s, 32 to be exact.  This doesn’t mean that I didn’t drive.  Read my post here on how I optimized my transportation expenses through my 20’s.  Shortly after we found out that my wife was pregnant with our first child, we decided that we would value the convenience of having a car.  I did a bit of research and less than a month later, we had a car.  Here are the steps I took to buy the car:

  1. Figured out what kind of car we wanted.  We wanted a larger four door sedan that was safe, comfortable, and reliable.  My wife and I landed on the Toyota Camry. That said, we decided we certainly didn’t need a new car so we looked for used. Having a single make and model in mind makes the search WAY easier since it really allows you to compare apples-to-apples (maybe not Royal Gala to Royal Gala since there are different trims and years, but close enough and not Apples to Oranges – e.g. a Hummer and a Prius).
  2. While watching a movie one night (I like to do things like this while watching movies), I tried to find every single used Toyota Camry in the province of Alberta.  My main sources of information were Kijiji, Facebook Marketplace, Autotrader, and a template e-mail that I sent to every single Toyota dealership in Alberta.  I found 162 cars.  I started a spreadsheet (as any good financial geek would) and inputted the following data on each car:
    1. Year
    2. Model trim (e.g. in this case LE, SE, XLE, Hybrid, etc.)
    3. # of kilometers
    4. Asking price
    5. Website link
  3. Knowing very well that cars depreciate in value but not necessarily in a linear fashion (generally depreciate the most in the first year or two of ownership), I thought I would plot data points to see if I could model the depreciation curve of the Toyota Camry.

A few observations from this exercise:

  • As you can see, there is a clear inverse correlation between number of km and price (generally as the number of km increases the price decreases – that makes sense and is aligned with what everyone knows about depreciation)
  • You can see a bit of a trend line of downward movement between 0 and 100,000km and then it seems to flatten a bit around that $15,000 mark (I noticed that there were some cars going for $15,000 that had 100,000kms and others in the same price range with 200,000km)
  • So how did I find value
    • To me, good value meant low price per km
    • Cars below the trend line you could say were undervalued (their price being lower than the average car with comparable mileage)
    • I found the market wasn’t pricing in the premium trims – when you buy a brand new Toyota Camry, you can pay twice as much for the premium models (e.g. XLE, XSE) than for the base models (LE and SE).  Based on my analysis, the used car market was not pricing in the premium trims (in some cases, I was able to find premium models that were selling for less than basic models in similar mileage range)
    • Looked for inefficiency in the market
      • Generally from what I saw, the dealerships were always around or above the trend line (i.e. higher pricing).  The dealerships also didn’t deviate too far from the trendline (they know the market)
      • The private sellers were all over the place and these made up a lot of the outliers that were way off the trend (either asking way above or below the market value implied by the trend line)
    • Ultimately, the car I ended up buying was a 2012 Camry XLE (the large gold bubble on the chart above)
      • This car was for sale by a private seller (trying to exploit the inefficiency!)
      • The car plotted below the trendline even though it was the “premium trim”
      • The car was listed for $15,000 and had 70,000 km on it (we negotiated down to $14,000 fairly easily)
      • There were comparable cars (same make/model/year) in the same price range that had DOUBLE the number of km on them.  Given this car was at the point on the graph where the depreciation curve flattened, it suggests that I may be able to drive this car for a few years and sell it for a similar value!  I’ll take it!

Once I negotiated with the seller, I quickly did the rest of my due diligence to make sure everything looked good and there were no red flags:

  1. Ran a quick Carfax report with the VIN# https://www.carfax.ca/
  2. Had an inspection done at a local Toyota Dealership
  3. Got a bank draft from the bank
  4. Took it for a test drive
  5. Bought it
  6. Registered it
  7. Drove it home

The only thing I will try to do differently next time is to get a car that is slightly more fuel efficient for city driving.  I find that the Camry gets very good fuel efficiency on the highway (especially for a V6) at about 7.0L/100km, however, the city gas mileage is not great (~10L/100km).  Though overall, we are really enjoying the car – no regrets on the purchase!