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I'm looking at Kelly Blue Book values for top business class sedans and they depreciate like crazy.

For example:

BMW 7 2010 : $82,000 - $137,000

BMW 7 2001 : $11,500 - $15,050


Merc S 2010 : $91,600 - $149,700

Merc S 2001 : $11,950 - $17,000


Audi A8 2010 : $74,550 - $78,400

Audi A8 2001 : $7,725 - $9,275

I can think of a few reasons for that but it still doesn't make sense to me:

  • Parts and repair costs for 2001 model is probably just as expensive as for 2010.

But how much you can spend in repairs, 10k, 20k in worst case scenario? That looks bad, but you already saved more than 50k. I don't know what could cost over 20k in repairs even on such car unless it is totaled. Besides if you don't want to make expensive repairs you can just send it to a scrapyard - all you lost is your 10k. That's the same amount you would instantly lose on 2010 model after it leaves the dealership.

  • No warranty

What's the point in warranty if you will lose over 50k in 10 years just because of depreciation? Might as well spend those on actual repairs (if you are unlucky).

  • Outdated technology

I think such 2001 model is still much more advanced than current Honda. Not to mention saloon and overall quality.

I don't know, it looks like a steal to me. For 10k you can get 5 y.o. Civic. I can't believe it is better than 10 y.o. German top sedan. Lets add 20k for repair expenses. I still don't think you would be able to find better brand new car even for 30k.

Can someone explain to me why those cars lose their value so drastically and why people don't want to buy them? Is 5 y.o. Civic really better?

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I am a bit conflicted about this question. It seems like it may be off-topic. However, it is a question about value and touches on the notion of saving money and getting good value out of our purchases –  George Marian Aug 27 '10 at 20:09
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Throw up some similar breakdowns of a civic and a camry. Also, I doubt they drop in value evenly over 10 years. Year 1 to year 2 is probably precipitous and year 9 to 10 is more gradual. Right? –  MrChrister Aug 27 '10 at 22:55
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Frankly, you are making a very good case for buying USED luxury cars. =) –  JohnFx Aug 28 '10 at 0:12
    
It is a steal, if you like the look/engineering/features/feeling of the car, don't care about having the latest and greatest, and have the financial safety margin to deal with the moderately small possibility they'll suddenly need major repairs. –  poolie Nov 24 '10 at 3:26
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6 Answers

  1. They are overpriced to begin with. One reason is the fact that they are luxury cars. A second, related reason, is that they tend to push the technology envelope.

  2. All cars depreciate drastically the minute they are driven off the lot. This a good argument for buying a car that is 1-2 years old. The higher you are, the more you can fall.

  3. Repairs and maintenance are typically still expensive on these cars, due to relative rarity and the lack of necessary expertise. Here is where that advanced technology bites you. This is a reason that a 5 year old Civic may be worth more than than a 10 year old Benz. It may simply not be worth the hassle of maintaining/repairing a luxury car. This is especially true for an aging luxury car. There are some people that only buy domestic, precisely because of the maintenance costs. Also, a 10 year old car is still a 10 year old car, regardless of the make. (There are a few notable exceptions, like the NSX.)

  4. Hondas and Toyotas have a great reputation for reliability and (long-term) total cost of ownership.

"Better" is a subjective issue, that depends on a variety of variables. A Civic is certainly not better in terms of technology, comfort, etc. But, it is likely better in terms of maintenance, reliability, etc. Which "better" you focus on, is up to you.

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What kind of exception is NSX? –  serg Aug 27 '10 at 20:29
    
@serg It is one of the most reliable sports cars and has maintained its value quite well. –  George Marian Aug 27 '10 at 20:35
    
Not saying that you are wrong, but do you have any information on why you say that? –  Bryan Denny Aug 27 '10 at 22:37
    
@bryan Regarding reliability The NSX was marketed as the first "Everyday Supercar" thanks in part to its ease of use, quality and reliability. en.wikipedia.org/wiki/Honda_NSX Regrading maintaining value, look up the prices for a well maintained one. :) –  George Marian Aug 27 '10 at 22:54
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Few people actually buy BMW's. Most are leased, because if you're the type of person who wants to drive a BMW, you're going want a new one regularly.

Here's the lifecycle of a BMW or other luxury car:

  • Initial owner leases it for 2-3 years.
  • Initial owner turns it in, the deal "certifies" it and sells it at a premium price. (This step is here to keep the residual value high and lease payments low over time)
  • Next owner keeps it around two years. Remember, you're buying a BMW at a dealer, you're buying paying for the mystique of the luxury vehicle, but can't afford the "real" (aka new) thing.
  • Now it lands in the auction and probably changes hands a couple of times in years 5-10.

By the time you hit ten years, you have a rapidly depreciating asset because the average Joe doesn't really want an old BMW and hassles that come with it or any luxury car.

That said, there are great bargains in this space. I used to buy 5-6 year old Cadillacs when they weren't cool for like $7-9k, and resell them a year later for about $1,500 less that I bought them for. (lower TCO than a Civic) You need to have patience though, because maintenance is always an expensive pain in the rear with luxury cars.

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+1 Excellent points. Interestingly, a quick search suggests that in Germany, where the market for these cars would be very different than in the US, a 2010 Audi A8 is cheaper and a 2001 Audi A8 did not depreciate nearly as much by comparison. –  Annoyed Jan 17 at 11:40
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There is usually a bunch of reasons for this, some psychological and some entirely practical. Let's start with the latter:

  • These are expensive cars not only to buy, but also to run - consumables like tires, spares, servicing is all rather expensive. Just because the car is worth less doesn't mean you get to pay less when you're getting it serviced. Oh, and they're expensive to insure because they're expensive to repair if they get bent.
  • They're complex, so you just can't take them to a backstreet mechanic unless said mechanic happens to specialise in them. Yes, basic work can be done my most mechanics but a lot of the other work requires specialist tools and specialist diagnostics.
  • These cars are often status symbols driven by people who need to show they're "successful". As such, driving something that's a few years old probably conveys the wrong message and thus, these cars tend to get replaced on a regular basis.

If I wanted an older luxobarge, I'd buy something from the early to mid 1990s in good condition. These cars tend to be a little less complex and thus a little easier to repair, plus you can find them for prices that makes them to 'disposable'.

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+1 They are over priced to begin with -

More specifically they are expensive to create exclusivity, which raises their value to people who value that kind of thing.

Perhaps folks who buy those cars aren't buying them for value or quality or performance, but are buying them for the badge and the intangible factors. I frequently hear about rich people who earned their millions driving around in cars Consumer Reports rank highly, so it isn't because they are so much better than a mid priced car.

A car for $140,000 is either equipped for the A-Team or is a status symbol. The status symbol notion is very expensive, but fades very quickly, hence the mighty depreciation.

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So you think those cars not worth even 10k? And someone driving 10 y.o. top of a line BMW doesn't look as cool as someone who drives new Honda? –  serg Aug 28 '10 at 15:29
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I think to a person who spends 140K on a car, a 10 year old bmw looks the same as a newer Honda. I am not judging it, it is just an opinion based on small sample sizes of people I know. –  MrChrister Aug 29 '10 at 18:59
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Personally, I buy newer luxury cars for two reasons.

1) Status symbol

Newer cars have the latest looks, performance, and features like heated side mirrors and sensors that adjust cruse control speed when in heavy traffic etc.

2) Older cars have more wear and tear.

No one has spent any significant amount of time in the car before and therefore you know the history of what the car has been through, like buying a new pair of pants. You know that no one has pissed in them ;).

After I have pissed in and tore up my now older luxury car, I sell it off and get a new one. Cars wear out and as they get older, they need parts replaced. My brother's Mazda, for example, just blew the head gasket after buying the car new and driving 130k miles over a four year period. Part of the luxury for owning a new car is the luxury of time, not having your car spend any significant amount of time in a garage being worked on, unless you buy a Land Rover of course ;).

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But don't you think the lower entry cost offsets potentially higher maintenance costs? –  MrChrister Oct 13 '12 at 4:40
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I believe one of the main reasons cars -- luxury or otherwise -- depreciate so quickly is that many auto accidents can cause serious engine/frame damage but are easily cosmetically repaired. If you smash up the car but get the body fixed, and you don't go through insurance, it will be indistinguishable from the same car that hasn't been in a crash.

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