Article

The Art of Appraising

August 2006, Auto Dealer Today - WebXclusive

by Bruce Thompson - Also by this author

Perhaps the most important position in a dealership is the appraiser. The decisions this individual makes can swing a dealership's sales 35 percent or more; not to mention, the store's wholesale profit or loss is almost always attributable to the decisions made by this individual. That being said, we are terribly inept at monitoring our appraisers or giving them better tools to do their job.
Last week I was with Mike Hockett, CEO of Auction Broadcasting Company and founder of Adesa. He told me that back in his wholesale/retail days he felt like he had failed if he missed a vehicle by $35. Now you have to understand that the average cost of a vehicle in 1975 was approximately $3500. Additionally, the wave of foreign imports had not even hit our shores. Today, we have hundreds of product lines and trim levels. However, we do things today just like we did them in 1975, 1965, 1955. Although our industry has drastically changed in the last 30 years, the way we do things has not.
 
Typically, we find out an appraiser has made poor decisions 90-120 days after he's been hired. Our volume and grosses start declining and our wholesale loss goes up. When we investigate, we usually find out that inventory is underwater and that we have a real problem on our hands. The primary reason we endure this pain, time and time again, is that we are reactionary to the problem. We should be proactive, monitoring this critical position and taking appropriate actions early to eliminate bad situations. There is an art to appraising vehicles and not everyone has the gift.
We must monitor the appraiser's performance to insure we have the best opportunity to trade for every customer's vehicle without buying the business. Conversely, we need to know whether we are stealing trades to offset wholesale losses. The problem has always been that there are simply no tools that allow us to proactively measure and manage the appraiser. There is a tremendous need for tools that help the appraiser avoid mistakes by giving him real-time information that help him make better decisions. Finally, there is a company that has developed the appraisal tools dealers have needed for years. The tools are being installed in dealerships all over the United States. As a matter of fact, they are now installed in 3 of the top 5 largest automotive groups in the country. The positive results are becoming transparent with the recent earnings announcements. Pay close attention to what they are saying about their used car business. The big public cap companies are seeing substantial lift and profitability in their used car business. There is a reason.
 
We conducted a study on the effectiveness of these appraisal tools in over 500 stores using them. In most instances the tools had been installed for at least twelve months. The results we found were astonishing. When the tools were initially installed, the dealerships were losing an average of ($300) on every vehicle appraised, traded for and wholesaled. Today they are making a $10 average profit on these same vehicles. That's a tremendous swing. What's even more compelling is that they are trading for more vehicles they appraise this year over last. Close ratios and performance metrics are tracked to each appraiser. So if an appraiser values 10 vehicles and trades for 3, he has a close ratio of 30 percent. The objective is to increase close ratios while mitigating wholesale loss. The dealerships using these tools are realizing significant performance increases.
 
As we know, anyone can buy a trade by putting too much in the vehicle. That’s a formula for disaster. It is also the reason a UCM (Used Car Manager) or appraiser can show significant sales improvement in his first 90-120 days. Ultimately, it catches up to him, which is why there is a 60 percent UCM turnover ratio in the industry. What the study showed was that although wholesale loss on trades has essentially been eliminated, close ratios have increased by 7-8 percent. This type of improvement is very significant. Collectively these groups might appraise 250,000 vehicles in a given month and wholesale 100,000 of them. Because the groups were able to increase close ratios, they sold an additional 18,750 additional vehicles this year over last because their appraisers made much better decisions. Unbelievably, they eliminated $3 million in monthly wholesale loss while trading for more vehicles.
 
What we also discovered was that the best appraisers in the country have 64-65 percent close ratios with negligible wholesale loss. The average is 38-39 percent with marginal wholesale loss and many were in the 20-22 percent range with substantial wholesale loss. That's a substantial disparity. We compared one Ford store to another within a few miles of each other and found incredible differences. One store had a 22 percent close ratio and was losing $50k a month in wholesale loss, while the one across town was at 53 percent close ratios with no wholesale loss. It was obvious that the 22 percent closer was trying to steal trades by appraising them $3000 below NADA trade-in value. The 53 percent closer hit the same vehicles at $1500 below NADA Trade-in value. That’s vital when each store appraises 600 vehicles a month. What it means is that one individual at the dealership is worth 186 additional unit sales because he makes better decisions! Think about that. It is imperative to monitor this critical position.
 
This type of analysis was done randomly all over the country. What our results showed us was that the disparity had nothing to do with store ownership, regionality or product line; it had everything to do with the individuals making the decisions and the processes they follow when valuing a trade. Today most appraisers rely on instinct and emotion when appraising a vehicle. That was probably okay twenty-five years ago when the average vehicle had an average value of $3,500. If an appraiser missed a vehicle, he didn’t miss it by much. Today is a new era and a much different world. We must incorporate new technology and process into our daily business. If not, we’ll be left behind.
 
I tell dealers all the time that the true value of a vehicle has nothing to do with the book value. The true value of a vehicle is what we can sell it for. This tool allows the appraiser to immediately see his past performance with a particular vehicle at the point of appraisal. He can actually drill down and see pictures, condition and details of each retail transaction. It allows him to compare apples to apples and eliminate the guesswork. The tool also tells him whether the vehicle is currently needed at his lot based on past performance and current stocking levels. At the stores we looked at, having real-time access to this type of information is transforming the way vehicles are valued. Dealerships are adopting technology that is the primary catalyst for increased lift and profitability.
 
Appraising is an art. With the new tools of the 21st century the art is being transformed into a very powerful competitive advantage for its users. If you’ll send me an email, I’d be more than happy to direct you to the tool we employed to study these dealerships.
Vol 2, Issue 4

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