I’m selling my car. We have been debating for some time whether we still needed our seven-seater. That’s the back story but what I really wanted to share about was the selling process. Specifically, how the economics for the middle man has changed as everything now goes online.Embed from Getty Images
Everything’s online, is there still a role for the middle man?
I am not an expert on cars but even I know that trading in your car to the dealer gets you worst price when you are trying to sell your car.
With the proliferation of online marketplaces, there are now many car trading sites. Positively, these have really increased the transparency of the used car market. Once you key in the make and model year, the search results will give you a pretty good idea how much your car should go for.
In my case, my 7-seater should go for something between HK$198,000 to HK$258,000. Armed with that information, I posted my ad near the top of the range. Our car was well maintained, the mileage was a bit on the high side but I also expected a bit of bargaining.
And so I waited. A few days passed. There were no bites except for one joker who wanted to barter and exchange his RAV4 for my car. Nope.
“Are you a private seller or a car dealer?”
I guessed that my price was too high and lowered the price to the middle of the advertised range. This seems to do the trick. My phone started ringing and people called to get more details. One question that always came up was whether I was a private seller or a car dealer. Most people seemed to be wary of car dealers, fearing that they would mess around with rolling back the mileage or other funny business.Embed from Getty Images
After much back and forth, a serious buyer emerged. As it turned out, the caller works for a garage and is reaching out on behalf of a prospective buyer. In other words, he was a middle-man. To make a long story short, I brought my car to his garage, he checked it out, done deal.
The Economics of the Middleman
But during the process, he was kind enough to share with me his economics.
Here are the headline numbers.
- I sold my car to the middleman for HK$218,000 ($10,000 lower than my list price).
- The prospective buyer is going to pay him HK$250,000.
- At the headline level, the middleman’s take is HK$32,000 or 12.8%.
However, as they need to redo the leather seats and put on some new tires, this costs of HK$13,200 is part of the HK$250,000 that the prospective buyer is paying for. Taking a 50% haircut on this number, I reckon the middleman’s margin is actually closer to HK$25,400 (HK$32,000 less HK$6,600) or 10.2%.
There’s more. Since the prospective buyer is trading in his 2007 sedan, the middleman is offering him a trade-in value of HK$40,000. According to the middleman, if the prospective buyer did not agree to buy my 7-seater, the price would have been HK$20,000. The middleman expects to sell the 2007 sedan for HK$25,000-35,000.
So, if you factor in middle man’s effective HK$5,000-15,000 loss on the 2007 sedan, the middleman’s real margin would have been reduced from HK$25,400 to something around HK$10,400 to HK$19,400 (a margin of only 4.2% or 7.8%).
At this point, we want to ask a couple of questions:
- Did I sell my car for too cheap?
- Why didn’t the prospective buyer approach me directly?
Did I sell my car for too cheap?
On the surface, it would seem that way since the prospective buyer was willing to pay HK$243,400 (HK$250,000 price less HK$6,600 for leather seats/tires). However, in the old days before the internet, the dealers would probably have lifted my car for HK$190,000.
Takeaway #1 – The internet has reduced the middleman’s margin reduced from 22% to 10.4%
So the first takeaway here is that the increased transparency of the internet has reduced the bid-ask spread. Whereas, before the middleman’s margin would have been HK$53,400 (HK$243,400 – HK$190,000), this has now been reduced to HK$25,400 (HK$243,400 – HK$218,000). In margin terms, the online market place has brought down the middleman’s margin from 22% to 10.4%.
Why didn’t the prospective buyer approach me directly?
But why does the middleman still exist? Shouldn’t the online marketplace had connected buyers and sellers directly? If the prospective buyer had approached me directly, we could have split the bid-ask spread and we would both be better off.
I think it has to do with information asymmetry. As the seller, I know that my 7-seater is in perfectly good condition. But from the buyer’s perspective, he cannot tell whether my car is pristine or has suffered serious water damage.Embed from Getty Images
To guard against being cheated, the buyer needs professional help from someone who he can trust. This is where the middle man comes in. Not only does the middle man help to vet the car’s condition, he also provides the prospective buyer with some recourse. If things go badly, there is a least a store front (in this case a garage) that he can go to protest.
Takeaway #2 – Information asymmetry and recourse sustains the middleman – for now
But what about me, the seller? I suppose if I have more time and more patience to deal with the various callers, I could have waited until the right price came along. However, for the service of matching me up against the buyer, the middleman’s fair wages is now 4-10%.
I suppose it is possible for someone to AirBnB or Uber this type of service but given that most people only change cars every five to seven years, there probably isn’t the volume to scale this business.
As a side note, the middleman also explained why a professional dealer would low ball at HK$190,000. The answer is rent. At the used car exhibition centres, dealers are required to rent at least six spaces and each space costs several thousand dollars. Given the significant rental costs, it takes the used car dealer three cars to breakeven and he only makes money on the fourth car.