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Consider resale values when buying new car

  • Story Highlights
  • Consider a car's resale value before buying new car
  • Expert: Higher incentives on new car, lower the resale price
  • Desirability and reliability factor into resale value
  • Volume of model also can drag down price
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By Jim McCraw
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New Cars, Used Cars, Kelley Blue Book Values at AOL Autos

(AOL Autos) -- If you're going to buy a new car this year, one of the things you must consider carefully is exactly how much it is going to be worth a few years from now when you're ready for another vehicle.

According to Jesse Toprak, senior analyst for Edmunds, in Santa Monica, California, there are four major factors that determine the value of a trade-in. The first is simple: supply and demand. High-volume production vehicles like the Ford and Chevrolet pickup trucks are so numerous they generally don't hold high resale value.

Another important factor, according to Toprak, is brand image. Some brands, like Toyota, Honda, and Porsche, have it, which is why those brands show up at the top of the resale value table year after year. "Deserved or not," says Toprak, "brand image is still one of the biggest determinants of the resale of a vehicle."

Toprak also says that the amount of rebate cash that was available when the car was new also influences the resale value.

"The higher the incentive spending on a new vehicle, the lower the residual value of a recent model-year used version of that that model. As you get to five years and older, the impact of rebates is a bit less, but it's still there. The first three years are impacted much more severely. Remember, if the vehicle has high incentives, there is a reason for it."

For example, if there were a $5,000 rebate available on a slow-selling luxury vehicle, the 2006 version of the same vehicle, slightly used, would be worth about the same as the 2007 model, Toprak says.

Another point to investigate would be how many units of a particular car, like a Ford Taurus, a Dodge Intrepid or a Saturn Ion, were sold to commercial and rental fleets, a factor which also tends to lower their resale value.

And, of course, the vehicle's market longevity will play a part in its value. Orphaned cars, those models that have been dropped or superseded, lose value very quickly, says Toprak, as do those vehicles made by orphaned brands, such as Oldsmobile and Plymouth.

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In the Edmunds study of 2004 model year vehicles, which would be ripe for trade-in or lease rollover right about now and are therefore very good indicators, the top passenger car in the study was the $440,000 Porsche Carrera GT supercar, at a used car trade-in value of 71.8 percent, followed by the much more affordable 2004 Mini Cooper at 69 percent. The Toyota Prius hybrid, oddly enough, came in third with 67.7 percent.

The Toyota Tundra crew cab pickup truck topped the truck list in the Edmunds study with a rating of 69.4 percent of original retail price. The second-place truck overall was the Honda CR-V at 68.1 percent, and the third-place truck was the extended-cab version of Toyota Tacoma at 66.9 percent.

The Edmunds study, taken from information supplied by 4,000 dealers and covering more than 20 percent of all transactions and more than 400 vehicle models, shows that the bottom three passenger cars from the 2004 data were the Dodge Intrepid sedan, at 30.7 percent, then the Chrysler Sebring coupe and Oldsmobile Alero coupe, tied at 31.9 percent. The Alero sedan came in third place at 31.4 percent. These were all victims of going out of production and/or being big players in fleets.

The Chevrolet Venture cargo van, a vehicle with a limited audience because of its lack of seats and windows, was at the very bottom of the resale value table in the Edmunds study, at a used car trade-in value of 29.9 percent, along with passenger version of the Venture at 31.6 percent and the Ford Freestar the out-of-production minivan, at 31.8 percent.

For a look at more recent vehicle resale values, we contacted Kelley Blue Book (KBB), of Irvine, California, which has projected resale value data for 2006 models five years into the future. Typically, says KBB, a vehicle loses 65 percent of its value in its first five years. But some have a slower depreciation rate, and KBB's top 10 for 2006 are vehicles expected to depreciate only about 50 percent over five years. New to the KBB list for 2006 are the Chevrolet Corvette and two hybrids, the Honda Accord Hybrid (which has gone out of production) and Toyota Prius.

KBB projects resale values in nine vehicle categories and then assembles a list of the overall top 10 leaders in projected resale value as well as the best brands overall. Low-volume vehicles and vehicles with a manufacturer's suggested retail price of more than $60,000 are excluded from the list.

KBB Executive Market Analyst Jack Nerad says their methodology is based on 80 years of experience. "You build a database and you see how things go and they're not very volatile. They tend to follow established patterns, and once you have a handle on the pattern, you have a good leg up on the data."

"To put a finer point on it," Nerad says, "trade-in values are a part of the entire resale value/residual value array. The good news is a vehicle with high resale value will always have high trade-in value. The trade-in value, as we define it, is essentially what you can expect to get from a dealer for that vehicle if you trade it in on another vehicle, which implies that it is something more like a 'wholesale' value. It assumes the dealer must do some prep work to bring the car to showroom condition ready for sale. The more general term 'resale value' includes not only trade-in value but also private party sales, auctions, etc. In our Resale Value Awards, we look at projected residual values because these are predictive of future values. We give these awards to current model year vehicles, so there are no historical values such as we have for used vehicles."

The KBB analyst says vehicles that have good reputations for desirability and reliability tend to retain higher values. "Given those parameters, it helps if the manufacturer keeps a given model in production for a longer period time, which doesn't apply, frankly, to the Japanese, but it does to brands like BMW and Mercedes-Benz. With them, you can get a car that's five years old, and it looks like the new one."

High-volume production numbers, Nerad says, don't necessarily mean lower resale values. "As long as the production is meeting retail demand, that's not a bad thing. If production is meeting individual people's demand, that's good. But if a company decides to build 200,000 of a vehicle and can only sell 125,000 of them at retail, they have to dump the rest of the production into fleets, where they make no money, and when they come back, their value is diluted."

Nerad adds that resale value revolves much more around consumer perception of value than anything else, even sometimes in spite of bad records for reliability and dependability. "If there's a kind of fanatical fan base out there for a particular brand, that can help. If there's a group that really wants them, there's no substitute for that." E-mail to a friend E-mail to a friend

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