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The Problems with Selling Used Cars with Recalls - Part 1

Part 1: Consumers Vote with their Pocketbooks

When it comes to selling used cars with recalls, dealers seek refuge from scrutiny by turning to fellow dealerships for validation.  We’re all doing it – it’s not against the law.  No, it’s not against federal law, but it also doesn’t mean that’s it good for business.  And there’s also a huge legal question tied to product liability, but let’s set that aside for the moment.  There’s no point to an ethical debate on a practice that is a pretty commonplace in our industry.  Instead, it would be more fruitful to focus on the pillars of good business, risk mitigation and an eventual legislative outcome that will force your dealership to change.  I’ll take the arrows of criticism, but I’m not alone in taking a similar position.  Brace yourselves – it’s not good business to sell a used car with an open recall.  Let’s explore the first of many issues further – consumer sentiment.

At first glance, it’s not fun being a dealer amidst millions of recalled vehicles and angry owners.  Parts shortages, not enough technicians, occupied service bays, dismal factory reimbursement, sales on new models down – how could anyone expect a dealership to absorb the cost of shelving used car inventory affected by a recall?  A few weeks ago, I found myself at an independent dealership discussing the subject of recalls with Hamit, the owner.  Of the 70 or so cars on his lot, about 20% have some open recall, to his dismay.  He explained that shoppers already scrutinize an independent lot more than a franchised dealership, and that franchise dealers the same disadvantage as his store when it comes to selling an off-brand used car with a recall.  Makes sense, right?  In the shopper’s eye, his inventory holds less value without a service center, skilled technicians or the ability to repair a vehicle affected by a recall. 

The volume of recall repairs doesn’t affect independents, but, on the sales side, Hamit knows that recalls are just another point of contention for shoppers who are already leery.  To offset fears, he purchases fewer recalled vehicles at auction.  To stay on top of recalls, he runs the VIN for recalls at acquisition and then again upon sale of the vehicle, recognizing that newly-announced recalls make it impossible for him to own a recall-free inventory. 

“I don’t want to get stuck with a car that is going to be difficult to sell,” he explains.  “It still happens, and I can only give the buyer two options because there’s not enough margin for me to lower the price – give me a couple of days to arrange for the repair at the local dealership or you take the car off the lot today and take care of the recall yourself.  I’m not going to hide from a recall.  I have to do the right thing because these shoppers are already aware of the vehicle’s history and will use any issue to negotiate for a lower price.  If I can’t be honest and up front with them, they will not buy from me and my ratings on CarGurus goes down.  That’s how you kill a business.”

Could it be that some independents are acting more ethically than some franchise dealerships – you bet.  In a hyper-competitive sales environment where the consumer has access to all vehicle data and a multitude of dealerships competing for the shopper’s dollar, honesty matters and, in Hamit’s case, actually differentiates his independent dealership from others who are selling similar makes.  You don’t need to ask the owner of an independent dealership to know that differentiation is almost impossible to establish in the used car sales market.  But, as it turns out, by openly disclosing to the consumer that a recall exists, the dealership is disarming the consumer from using that omission at the bargaining table.  Not only that, it’s simple good, honest business.

Here’s your chance to stand by your product, give shoppers a confident buying experience and garner the highest resale value on your inventory.  Sure, it comes at a cost.  You may have to hold back the sale of that recalled vehicle for a couple of days while the repairs are made, but there’s no better sales leverage than safety.  Is your competitor offering a “recall free guarantee” or connecting the buyer to an authorized dealer locally?  Probably not. 

In a 2018 attitude survey about vehicle recalls, 55.2% of consumers revealed that they hold strong negative opinions of dealerships that don’t go out of their way to disclose a recall prior to purchase.  If you depend on online reviews and referrals from customers, your dealership needs to take a stronger stance on recall compliance.  If not for mitigating risk and financially liability, protecting your inventory from recalls is just good business.

In a similar December 2017 survey conducted by Public Policy Polling, 85% of Tennessee respondents indicated that recall repairs should be made prior to the sale of a vehicle.  Only 13% of respondents felt that a simple disclosure was enough.  When survey takers were presented with a scenario that involved a dangerous recall, like a Takata airbag, 94% of consumers thought that the dealer should not be able to sell the car.  In an industry that depends heavily on customer retention, referrals and satisfaction scores, selling used cars with recalls goes clearly against the will of the people. 

 Whether an independent dealership or a franchise dealership with off-brand vehicles on your lot, recalls still ought to be a dealership priority.  While federal law prohibits the sale of any new vehicle with an open recall, the Motor Vehicle Safety Act does not address used vehicles. As a result, Federal law does not prohibit a dealer from selling a used vehicle with an open recall nor does it require the OEM to compensate the dealer from holding it in inventory should the dealership take a virtuous stance.  The lack of clarity on the subject has placed consumers and dealers in a precarious position.  However, as I eluded to, we’re not having a legal discussion at the moment.  Let’s stick to the consumer buying experience.

It’s an easy leap to see where used car shoppers don’t benefit from any less than overt disclosure, but what about consumers who own used cars with recalls?  In a climate where recalls deflate the value of a vehicle, how does the consumer benefit from lower trade-in value or the inability to sell that car on the open market due to a recall?  The issue of recalls creates complexity for consumers as well.  For the moment, let’s focus on dealerships and what’s at stake.  Let’s point out the obvious – the used car market is hot, but also precarious.  Reconditioning a vehicle acquired in the open market, at trade-in or at auction has to be done at break-neck speed.  Every second counts, so the prospect of sending that vehicle to an authorized dealership for recall repair seems unlikely, especially since federal law doesn’t require the dealer to do so.  Case closed, right?  Not as long as consumers can vote with their pocketbooks. 

Selling a vehicle with an open recall, while legal, is frowned up by consumers.  At what risk to the brand are you willing to go in order to move inventory?  Granted, Hamit never shelved inventory at his independent, but he went a step beyond a discreet printed disclosure and gave the consumer an option that called on his dealership to arrange for the repairs.  As a result, he never had to sacrifice profits nor his integrity.  He never had to be reticent about recalls or slide a disclosure under their unsuspecting nose – he was up front and honest.  Hamit also mentioned that he faces more competition at auctions from franchised dealers looking for recalled vehicles that they can repair for factory reimbursement and then put on the lot at a premium used car price.  For these franchised dealerships, they win on both service and sales fronts along with protecting their brand by taking an unsafe car off the road.  He wonders why it is that franchise dealerships have to act so clandestine when it comes to recalls, given that every dealership has similar issues.

While disclosures may meet a legal requirement (all 50 states have some disclosure laws on the books), it’s just not enough for consumers, who may not even understand what they’re signing.  It doesn’t meet the smell test – it’s underhanded, misleading and in direct conflict with what consumers expect.  Anything less than clear verbal disclosure and assisting the new owner on how to resolve the recall is bad business.  If you don’t know that, you’re just not being honest with yourself and your not positioning your dealership to win consumers over the long haul.  There are ways to manage a recalled vehicle and the process of disclosing it to a consumer who is falling in love with the concept of driving it off your lot.  There’s a lesson here from a small independent dealership in Burbank, California – we should all take note.

In the coming weeks, we’ll look at a few other pitfalls that selling used cars with a recall present.  However, if approached proactively, the recall crisis is better described as an opportunity for dealerships rather than a pitfall.  It’s not all bad news.  In fact, this is the moment where the chasm widens.  Is your dealership a market leader building a loyal base of customers by acting in their best interest or is your dealership setting its own hair on fire to get rid of the tangles?  Oh yes, what a tangled mess we have on our hands with recalls. 

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