[davewritescode]

The problem is with buying cars site unseen. I follow some car groups that revolve around tuning BMW engines for lots of power. It became a meme to post before and after pictures of heavily modified, drag strip/race prepped cars and then on the back of Carvana trucks some months later.

I feel really sorry for people who bought some of those 340s and M3s.

It’s just too easy to unload junk cars on companies like Carvana. Dealerships have the tools to sniff this stuff out during trades.

[ghaff]

Even dealers weren't digging deeply during peak shortages. I probably overpaid for the new car I had to wait for last summer. (Minimal negotiating leverage.) But I got what seemed like a surprisingly high trade in as well.

But part of that was there was probably a period where you had buyers who were desperate for vehicles, any vehicle, that would get them to work or the store.

[whakim]

I don't actually think buying cars sight unseen is the main obstacle here, because what you're describing (folks taking advantage of the system) represents a tiny percentage of transactions.

I think the biggest issue is that you've taken a business which has notoriously low margins (used cars) and you're operating on the lowest margin end on both sides. On the sell side you're buying cars that would otherwise be sold private party - i.e. from the most price-conscious sellers. On the buy side you're competing against dealerships on price but also offering a more premium/white-glove experience which eats into your margins.

[scarface74]

The problem is that like with OpenDoor, asymmetrical information favors the seller.

If I know I can get a better deal, I’m not going to use Carvana or OpenDoor. If I know there is something wrong with my car/house I’m going with Carvana/OpenDoor.

[slt2021]

aka "Lemon markets theory" by George Akerlof, which won Nobel Prize in Economics in 2001

https://en.wikipedia.org/wiki/The_Market_for_Lemons

[scarface74]

Thanks for the citation.

I listen to a lot of economic podcasts and subscribe to Ben Thompson’s Stratechery newsletter/podcast. I couldn’t remember where the theory came from.

[whakim]

But everyone knows they can get a better deal than Carvana/Carmax/etc. - they're selling to Carvana because it's convenient.

In theory, Akerlof's lemon theory could lead to a situation in which Carvana has to underpay to account for all the lemons they're buying to the point that sellers aren't willing to take the hit. In practice, I think this just isn't a big deal - they aren't buying enough lemons to move their offer prices much, and the convenience factor is worth quite a lot of money to sellers. If this was truly a major issue I think we'd see it with CarMax who are wildly successful.

[scarface74]

Carmax does a thorough enough inspection at their shop with trained mechanics beforehand.

[ghaff]

Which usually works against a consumer when dealing with businesses. But, in the case of used cars, there are definitely cases where a seller knows that some major system of their car is basically being held together by duct tape--which gets them a good purchase price and may well screw the ultimate buyer of the vehicle.

[xyzelement]

Btw I think you are describing "adverse selection"

[Retric]

It’s a tiny percentage of the market, but if you’re not doing due diligence then it’s going to be a large problem for you.

[yellow_postit]

Even Carmax does a modicum of due diligence. Carvana just sounds like a terribly run business model that could only operate on hopium.