Why You Should Not Buy A Car On Craigslist or Ebay

When I was reviewing an old Sears training manual from the 1980s, I encountered passage that was being used to train new salespeople. The passage pointed out that every American has a fixed amount of discretionary income, and it is up to the sales guy to capture as much as that “pie” as possible by suggesting additional features, extended warranties, and various other upcharges.

From the customer’s perspective, encountering someone with such a sales perspective is self-evidently awful because it means the ultimate objective is not to provide you with what you need but rather to pry as much money out of your wallet as possible. This can easily lead to a generalized grievance that everyone is business is out to get you.

But I would like to suggest to you that there is a way of figuring out when a seller is most likely to take advantage of you. Essentially, any instance where you are going to have repeat financial transactions with a seller will result in a higher probability of the seller being forthright with you.

For instance, consider the case of a car insurance broker. When you visit the broker, you probably want as much insurance coverage as possible at the lowest possible price. The insurance broker may have a contrary financial incentive because they may receive higher compensation from certain insurance companies than others, which may not necessarily track the insurer that would charge you the highest rates.

However, “upcharging” you carries a risk for the broker because if you recognize that you are being overcharged, you are likely to leave the broker. Instead of the broker collecting year after year of commissions and fees from you, the unrealized future stream of income could disappear in a poof if they seek an extra $50 in commissions to your disadvantage. The more likely you are viewed as a source of repeat business from a seller, the more likely you are to be a recipient of good-faith and fair-dealing tactics.

If you had to figure out a general formula, it would be something like this: Every seller has an incentive to act fair when the threat of loss of repeat business is greater than the financial rewards that would come from ripping you off.

This brings us to purchasing cars on Craigslist or Ebay. When you are purchasing a motor vehicle, you are making a large, one-time purchase from a seller. Other than real estate, there is almost nothing that involves as much money riding on a single transaction. From the seller’s perspective, the incentive to take advantage of you is as strong as it can be under the business conditions of everyday life. If you have a car to sell, capturing an extra $1,000 to $5,000 from someone by not disclosing issue X, Y, and Z about the vehicle’s condition or title can be financially enticing because as long as you draw up a contract selling the car as is (which nearly all Ebay and Craigslist motor vehicle purchases are), the seller is primed to capture the benefits of non-disclosure. In short, an Ebay or Craigslist seller only needs to find one sucker to make their day because if there are an individual seller, there is no future inventory or care about repeat business with you.

Secondarily, this is why the most trustworthy car dealerships in town usually charge higher prices than their competitors. It is effectively a “trust premium” where you as a buyer are saying, “You know what, I’m making a big, one-time decision. This dealership has a concrete, brick-and-mortar location that has been around for decades and has satisfied thousands of customers like me. They are not going to risk lying to me about flood history, prior accidents, hidden structural issues, or maintenance histories because if I catch them, I can leave an online review or such that will discourage people like me from engaging in future transactions with them.”

That is why I bristle when someone says, “You paid $15,000 for that Toyota at the dealer? I got one with the same miles for $13,000 on Craigslist.” It sounds like an apples to apples comparison because it is the same product being discussed, but really it is apples to oranges because of certain probabilities that come attached to the purchase. The person who pays $15,000 at the reputable dealer may only be taking on a 1% chance of receiving a vehicle with significant disclosures that may affect the future life of the car, but the Craigslist or Ebay car buyer may be taking on a 17% risk that a material non-disclosure will affect the future use and cost of the vehicle. That is why those used car-dealers that show up in parking lots and constantly renaming themselves have prices that are lower than reputable dealers but higher than Craigslist sellers. It is operating a middle position on the trust spectrum.

In short, large one-time transactions are the purchases with the greatest risk of causing you financial harm due to the incentive of the counter-party to deceive you, and purchasing a vehicle on Craigslist or Ebay can often involve one-time sellers that are indifferent to future dealings with you and whose only incentive is to get as much money from you now as is possible under the circumstances. I would of course make an exception for Ebay Motors sellers that have extensive reputational histories, as they are operating under a similar incentive structure to your town’s reputable car dealer.

When you approach a financial transaction, you need to think about your seller’s incentives. Craigslist is great for buying used tables and similar personal property items for $40-$80. You can save real money because the opportunity to deceive is low and the cost of the risk-shifting of the burden of deception to you is tolerable because the issues with such items are usually self-evident and even in the event of deception, the cost you bear is low.

But large-scale, one-time purchases are where you are at your weakest position when dealing with a seller that is not focused on future business that is central to the seller’s economic prosperity. If someone is selling a car to you on Craigslist, there is no incentive to provide you any more trustworthiness than is required by the bare minimum of your state’s laws because the objective is to squeeze as much money as is possible from you in a single occurrence. It is a bad combination to walk into a financial transaction where the knowledge asymmetry is great (the seller knows the vehicle’s history but you don’t) and the operating incentive is to maximize the money that can be taken from you in a single transaction.

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