The Art and Science of 'Carbitrage'

By Chatzky, Jean | Newsweek, January 16, 2012 | Go to article overview

The Art and Science of 'Carbitrage'


Chatzky, Jean, Newsweek


Byline: Jean Chatzky

Turns out you can make a mint off the car in your driveway. Here's how to be your own used-auto dealer--and take advantage of the huge demand for gently used vehicles.

Looking for a way to pay off that holiday tab? Check the garage. If you have a car at the end of its lease, it could be a gold mine.

The last three years have been tumultuous in the world of used cars, for a number of reasons. First, the recession meant that consumers who were trying to economize opted to shell out for used rather than new cars. As a result, the demand for older vehicles started to increase. The credit crunch, which got in the way of new-car financing for many consumers, sent used-car prices even higher. And then came the earthquake and tsunami in Japan last March. These tragic events reduced the supply of new Hondas and Toyotas coming into the United States, sending demand for used ones through the roof.

The demand is highest for low-mileage cars that have been well cared for. In 2009, the average price of a three-year-old used car rose 5.71 percent from its 2008 level, according to Edmunds.com. In 2010 the increase over the previous year was 12.18 percent, and in 2011 it was 6.31 percent. Result: the cars coming off lease now are worth, in many cases, thousands more than their "residual" or "buyout" values--in other words, the projected value of the car at the end of your lease. This is particularly true of European and Japanese cars, says Phil Reed, senior consumer-advice editor at Edmunds, though it's happening with some domestic cars as well, particularly those with above-average fuel efficiency.

Though it may seem daunting, it's actually easy enough to put that extra money in your pocket. First, take a look at the lease contract (or call the leasing company) for your buyout price. Next, use a car-pricing site like Edmunds, TrueCar.com, or kbb.com, to compare the buyout price with your "trade-in value" (how much a car dealer would pay you for the used vehicle) and the "private-party price" (how much you could get for it if you sold it yourself).

Of these two courses, the easier by far is to sell the car to a dealer. …

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