In December 2014, I bought a Honda Fit outright. He had 23 miles, and I paid $20,814.80, including accessories and an extended warranty. This is amazing In December a rowdy start-up called Carvana drove away and cut me a check for $20905 – making me $90.20 in profit.
Not only that, but the Carvana was $5,000 higher than the Vroom, $6,000 higher than the TrueCar, and $7,500 higher than the CarMax. Carvana’s offer changed day by day, too: the last offer I accepted was $1,338 higher than the lowest bid.
I knew everything was going for me—low mileage, no accidents, and desirable finishes at a time when car prices were hitting the roof on a model Honda had discontinued. However, it seemed ridiculous. Used cars never sell for more than their original price, and the company didn’t know anything about me. However, Carvana’s algorithm agreed to pay $20,000 for my unseen car, and even bring a pre-printed check to my door, before any checks were made. The quote arrived online very quickly, and I knew a human couldn’t be more involved.
But Carvana didn’t become the fastest-growing digital car dealer in the US (and the third-fastest ever on the Fortune 500) by asking pesky humans how much a car would cost. Instead, it built a computer system that you trust That’s implicit No employee has ever asked about the value of a Honda Fit.
On Tuesday, December 14 at 4:46 p.m., a Carvana dealer called to say she was waiting outside, ready to spare me the wheels of my car.
She handed the keys, went to work to check the odometer, tapped information in her tablet, and took some quick photos, but she didn’t do any mechanical checks and didn’t ask any questions. Simply sign the title, sign the property, sign the smog check, and here’s your pre-printed check.
Later that week my bank told me the check looked good and added half the balance to my account. The rest was cleared the day before Christmas.
Charlie Chesbro, chief economist at Cox Automotive, totally doesn’t believe it. (Cox Automotive publishes Kelley Blue Book and Autotrader and operates Manheim auctions.) “I’ve heard crazy stories, but not quite a single story about a seven-year-old car selling for more than it originally paid.”
Chesbrough explains it he is Fun time to be in the used car market – unlike anything he had seen in his 20 years as an analyst. “The only time we might have seen anything similar to this was during World War II when the vehicle manufacturing plants closed, and they switched to making aircraft,” he told me.
Over the past 21 months, car prices have risen at an unprecedented rate. Initially, demand dried up in March 2020 when states began issuing protection orders in place, but Chesebrough says they bounced back once the federal government began sending out stimulus checks in May. Buyers wanted the ability to get out of town, and go places without worrying about strangers crammed into their buses or subway cars—”personal transportation became a priority,” he says.
When the chips shortage happened, then used Car prices are starting to rise, too. Chesebrough says the entire industry can currently only produce a little over 1 million cars per month, and it’s easy to quantify the impact across the US: There were 1.8 million fewer cars at many dealers in December 2021 than in December 2020 and 2.5 million. less than 2019.
Suddenly, buying a new car became a shady proposition – and not just because some dealers charge expensive fees. There are very few cars that buyers won’t necessarily find a car with the color or trim they want. “We’re in an environment where everything gets picked,” Chesbro says.
So potential new car buyers may become used car buyers. Maybe they try a noisy app that brings cars to your door.
None of this explains why for me The car is worth a lot. “To me, it feels like someone has a glitch in their system,” he says.
Carvana executives don’t think they have a fault. But they also can’t explain what’s going on with my Honda Fit.
The company’s last three quarterly earnings releases show that it has more than doubled its revenue and earnings year-over-year and that the company is making an average profit of more than $4,000 for every car it sells. But it’s not clear how Carvana could make anywhere near my car.
It turns out that the “invisible buy my car” part is really easy to explain. The founding team of Carvana realized that perfect information can never be had – no buyer at all – yet that doesn’t stop thousands of cars from being sold on the auction yard with neither a test drive nor mechanical checks. Somehow, human bidders with relatively little information are still able to come to an agreement on the true price of a car. So Carvana has built an algorithm that performs similar to human bidders in those kinds of auctions and now trusts it to give you a guaranteed amount of money and show up with a pre-printed check instead of bargaining down the aisle.
The system combs through public databases that record insurance, registration, mileage, accidents and more before it issues that initial quote – and doesn’t pay the highest price for Any car that has been in an accident. (Carvana actually gave me the lowest bid of any online service for my wife’s Honda Accord, unlike what I’ve seen with my Fit, because it got a secondary flap a while ago.)
But if no accidents are reported, scratching out $50 or $100 is fine — even predictable.
“If the lawyer shows up, and this car is accurately represented, no one will try to take advantage of us… we will internalize that,” said Carvana President, CEO, and Chairman Ernie Garcia III in an interview. Only fixes that go beyond the “expected dollar limit that will be meaningful” launch a process where Carvana may take the customer aside for a revised price offer, Garcia tells me emphatically that Carvana no Chasing down customers who sell a car turns out to have mechanical problems. Instead, it sells it wholesale or has it repaired at one of its 13 inspection sites across the country. “The average car gets $1,000 in parts and labor is put into them before they are sold to the buyer,” Garcia says.
According to Carvana’s Tom Tyra, who has led product at competition TrueCar for more than a decade, the actual quote you see revolves primarily around three factors: what the car will sell for in today’s wholesale market, what Carvana projects are worth, and what cars are Carvana needs to be stored in its inventory. “The mileage on it, the accidents on it, the condition you reported — all of those things are adjustments,” Taira says. But they are not at the core of the algorithm.
And it was this third factor, Tyra guesses – the need to plug holes in Carvana’s own stock of cars – that may have caused the algorithm to bid aggressively on the seven-year-old blue-crutch Honda Fit with its silver rims and alloy wheels.
“Systems buy normally or are more aggressive on certain vehicles, so we can fill in the ‘holes’ we want in our inventory,” Taira says. Just like the dealership, Carvana needs to offer a selection of cars to choose from, not just small selections. “We’re trying to provide a comprehensive experience,” he says. Inventory is a major concern for Carvana: Last year, the company couldn’t keep enough cars in stock.
But Taira also wonders if the algorithm got it very Aggressive with my Honda Fit. It is not guaranteed.
Sometimes, he says, the model makes mistakes, usually when data sources give it wrong information about the car. “There are cases where you have cars that are very difficult to check,” he says. “I’ve never seen a $25,000 error with any amount of imagination, but on a monthly basis there are quite a few $3,000-$5,000 errors that we make because the data is incorrect.”
But Carvana also says it uses those outliers to reset the algorithm and is more actively discussing the bugs during management meetings. Tyra says my car never got up.
Garcia seems skeptical of his company’s presentation, too. And he suggests I might have been able to get my money back, say, from a 2018 model since the pandemic sent used-car prices up more than 30 percent.
“Back in 2015, that was definitely not my expectation,” he says, adding that it was especially baffling to hear that Carvana paid more for my Fit than other lower mileage events or newer model years.
Last Friday, I got Carvana’s final answer. The short version? It’s not wrong – at that moment in time, Carvana’s algorithm thought it could pay me that much and still make a profit.
Here’s the longer version, via Carvana spokeswoman Veronica Cardenas:
Looks like we made a solid showing of your car, but not by much. We currently expect to make a small margin on the vehicle itself, not including financing and insurance. Apparently, your car was unique (low mileage, manual transmission) creating a show based on the wholesale and retail markets at that moment in time. With the wholesale and retail market being so volatile – especially for unique cars – I’ve certainly benefited from a moment when the market was appreciating your car the way it did. As the market stabilizes this year, the frequency of these opportunities for consumers will decrease.
I’m still a little skeptical: A 2018 model with a manual transmission and 17,000 fewer miles could recently be had for just $1,685 more than what the Carvana paid me.
In order for Carvana to achieve that “small margin” without relying on financing or insurance, it would need a pricing high enough to cover the cost of moving my car to Arizona, getting it checked out, having it photographed, and any basic maintenance like an oil change, and dealing with paperwork (by the way, I had a problem with Florida because of paperwork), and do it all despite the usual winter slowdown in used car sales.
Carvana executives think of it as a portfolio — there will be winners and losers, so the company doesn’t need to beat every car it sells, and Chesbrough says the company’s explanation is reasonable enough. “But they can’t run the majority of their sales at margins as low as yours, so they better hope their algorithms are right the vast majority of the time,” he adds.
The important thing to take away is that I was lucky, is yours A seven-year-old car probably won’t produce the same windfall.
Before I let her walk away from my 2015 Honda Fit last month, I asked a Carvana dealer what she thought of the company. She told me that she believes this is how all cars will be sold in the future: not by salespeople at dealerships who haggle with a customer about a car’s value but in simple, direct interactions where someone shows up with a check — or a car. I thought about the hours I spent at the dealerships, and I couldn’t disagree.
Even if I sold this car for a few thousand less or even to a Carvana competitor, I wouldn’t want to do it any other way.