In December 2014, I bought a Honda Fit right off the lot. It had 23 miles, and I paid $20,814.80, including accessories and an extended warranty. This December, a buzzy startup called Carvana drove away with my car, cutting me a check for $20,905 — leaving me with a profit of $90.20.
Not only that, but Carvana’s offer was $5,000 higher than Vroom, $6,000 higher than TrueCar, and $7,500 higher than CarMax. Carvana’s offer changed day by day, too: the final one I accepted was $1,338 higher than its lowest quote.
I knew I had everything going for me — low mileage, no accidents, and desirable trim at a time when car prices are going through the roof on a model that Honda discontinued. And yet, it sounded ludicrous. Used cars almost never sell for more than their original price, and the company knew next to nothing about me. Yet, Carvana’s algorithm had agreed to pay $20K for my car sight-unseen, even bring a pre-printed check to my door, before any inspection took place. The online quote arrived so fast, I knew a human couldn’t have been involved.
But Carvana didn’t become the fastest-growing digital car dealership in the United States (and the third-fastest company to ever make the Fortune 500 list) by asking pesky humans the price of a car. Instead, it built a computer system, one it trusts so implicitly that no employee was ever going to question what my Honda Fit was worth.
On Tuesday, December 14th, at 4:46PM, the Carvana agent rang to say she was waiting outside, ready to relieve me of my wheels.
I handed over the keys, and she got to work checking the odometer, tapping information into her tablet, taking a few cursory pictures, but she performed no mechanical inspection and asked no questions. Just sign the title, sign away ownership, sign for smog inspection, and here’s your pre-printed check.
Later that week, my bank told me the check looked fine and credited half the balance to my account. The rest cleared the day before Christmas.
Charlie Chesbrough, senior economist at Cox Automotive, doesn’t quite believe it. (Cox Automotive publishes Kelley Blue Book, Autotrader, and runs Manheim Auctions.) “I’ve heard crazy stories, but I haven’t quite heard one with a seven-year-old vehicle selling for more than you originally paid.”
Chesbrough explains that it is a wild time to be in the used car market, though — unlike anything he’s seen in 20 years as an analyst. “The only time we might have seen something similar to this was during World War II when the factories for making vehicles shut down, and they switched over to making airplanes,” he tells me.
For the past 21 months, car prices have been rising at an unprecedented rate. Initially, demand dried up in March 2020 when states started issuing shelter-in-place orders, but Chesbrough says it came roaring back as soon as the federal government started sending out stimulus checks in May. Buyers wanted the ability to get out of town, to go places without worrying about strangers packed into their bus or subway car — “Personal transportation became a priority,” he says.
When the chip shortage hit, that’s when used car prices began to spike, too. Chesbrough says the entire industry can currently only make a little more than a million cars per month, and the impact is easy to spot across the United States: there were 1.8 million fewer vehicles on dealer lots in December 2021 than in December 2020 and 2.5 million fewer than in 2019.
Suddenly, buying a new car becomes a dicey proposition — and not just because some dealers are charging a markup. There are so few cars that buyers won’t necessarily find a vehicle with the color or trim they want. “We’re in an environment where everything’s been picked through,” says Chesbrough.
So maybe potential new car buyers become used car buyers. Maybe they try a buzzy app that brings cars to your door.
None of that quite explains why my car would be worth so much. “To me, that sounds like somebody’s got a bug in their system,” he says.
Carvana executives don’t think they have a bug. But they also can’t quite explain what’s going on with my Honda Fit.
The company’s last three quarterly earnings releases show it’s more than doubled its revenue and profit year over year and that the company averages over $4,000 in profit for every car it sells. But it’s not clear how Carvana could make anywhere near that on my vehicle.
It turns out that the “buying my car sight-unseen” part is actually pretty easy to explain. Carvana’s founding team realized it could never have perfect information — no buyer ever does — yet that doesn’t stop thousands of cars getting sold on the auction block with no test drives and no mechanical inspections either. Somehow, human bidders with relatively little information are still able to come to an agreement on the true price of a car. So Carvana built an algorithm that performs similarly to the human bidders at those kinds of auctions and now trusts it to offer you a guaranteed sum of money and show up with a pre-printed check instead of haggling on the driveway.
The system combs through public databases that record insurance, registration, mileage, accidents, and more before it issues that initial quote — and it doesn’t pay top dollar for any car that’s been in an accident. (Carvana actually gave me the lowest bid of any online service for my wife’s Honda Accord, the opposite of what I saw with my Fit, because it got in a minor fender bender a while back.)
But if there are no reported accidents, a $50 scratch or $100 dent are fine — even expected.
“If the advocate shows up, and this car was accurately represented, nobody was trying to take advantage of us… we’ll absorb that,” Carvana president, CEO, and chairman Ernie Garcia III says in an interview. Only repairs that cross “an expected dollar threshold that’s going to be meaningful” trigger a process where Carvana might take the customer aside for a revised bid, and Garcia flatly told me that Carvana doesn’t chase down customers who sell a car that turns out to have mechanical issues. Instead, it sells them wholesale or fixes them at one of its 13 inspection sites around the country. “The average car gets about $1,000 parts and labor put into it before it gets sold to the buyer,” Garcia says.
According to Carvana’s Tom Taira, who led product at competitor TrueCar for over a decade, the actual quote you’re seeing primarily revolves around three factors: what the car would sell for on the wholesale market today, what Carvana projects it will be worth, and which cars Carvana needs to stock in its inventory. “The miles on it, the accidents on it, the condition that you’ve reported — all of those things are adjustments,” says Taira. But they’re not at the algorithm’s core.
And it’s that third factor, Taira guesses — the need to fill in holes in Carvana’s own inventory of cars — that might have caused the algorithm to aggressively bid for my seven-year-old blue stick shift Honda Fit with its silver trim and alloy wheels.
“The systems are naturally buying or being more aggressive on particular vehicles, so we can fill ‘slots’ that we want to have in our inventory,” Taira says. Just like a dealership, Carvana needs to offer a selection of cars to choose from, not just slim pickings. “We’re trying to give an overall experience,” he says. Inventory is a big concern for Carvana: last year, the company couldn’t keep nearly enough cars in stock.
But Taira also wonders if maybe the algorithm got too aggressive with my Honda Fit. It’s not foolproof.
Sometimes, he says, the model makes mistakes, usually when data sources give it the wrong information about a vehicle. “There are cases where you’ve got very difficult cars to verify,” he says. “I’ve never seen a $25,000 error by any stretch of the imagination, but on a monthly basis, there are a handful of $3,000—$5,000 errors that we make because the data’s not correct.”
But Carvana also says it uses those outliers to re-tune the algorithm and actively discusses the biggest mistakes during its management meetings. Taira says my car never came up.
Garcia seems suspicious of his own company’s offer, too. He suggests I might have been able to make my money back with, say, a 2018 model since the pandemic has driven used car prices up more than 30 percent.
“Going all the way back to 2015, that certainly would not have been my expectation,” he says, adding that it’s particularly confusing to hear that Carvana paid more for my Fit than other Fits with lower mileage or newer model years.
Last Friday, I got Carvana’s final answer. The short version? It’s not a bug — at that moment in time, Carvana’s algorithm believed it could pay me that much and still make a profit.
Here’s the longer version, via Carvana spokesperson Veronica Cardenas:
It appears we did make an aggressive offer for your vehicle, but not by much. We are currently projecting to make a small margin on the vehicle itself, not including finance and insurance. Apparently, your vehicle was unique (low miles, manual transmission) which generated an offer based on the wholesale and retail markets at that moment in time. With the wildly fluctuating wholesale and retail market – particularly for unique vehicles – you definitely took advantage of a moment where the market valued your vehicle the way it did. As the market stabilizes this year, those opportunities for consumers will become less frequent.
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 Carvana paid me.
For Carvana to make that “small margin” without relying on financing or insurance, it would need to price it high enough to cover the cost of transporting my car to Arizona, inspecting it, photographing it, any basic maintenance like an oil change, handling the paperwork (it’s gotten in trouble with Florida over paperwork, by the way), and do it all despite the typical winter slowdown in used car sales.
Carvana’s executives think of it like a portfolio — there’ll be winners and losers, so the company doesn’t need to win on every car it sells, and Chesbrough says the company’s explanation is reasonable enough. “But they can’t operate the majority of their sales with low margins like 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 while I got lucky, your seven-year-old car probably won’t produce the same windfall.
Before I let her drive away with my 2015 Honda Fit last month, I asked the Carvana agent what she thought of the company. She told me she thinks this is the way all cars will be sold in the future: not by salespeople at dealerships haggling with the customer over what a vehicle is worth but in straightforward light-touch interactions where someone simply shows up with a check — or a car. I thought back to the hours I’ve spent at dealerships, and I couldn’t disagree.
Even if I’d sold this car for a few thousand less or even to one of Carvana’s competitors, I wouldn’t want to do it any other way.