Have you ever done something enough that it becomes like second nature and as if you can do it in your sleep? With the baseball playoffs in full swing, I am reminded of major league pitchers, who can robotically and repeatedly throw strikes. And rightfully so, as they have thrown tens of thousands of pitches over their baseball careers. However, as baseball fans know, sometimes the most reliable strike-thrower can get a case of the “yips” and cannot seem to find the zone. For many of you in the dealership world, the act of taking in a vehicle on trade is probably one of these things that has become automatic. However, recently we have received numerous Hotline calls about issues concerning trade-in vehicles. Like a good pitching coach, who can make a minor suggestion or tweak to get a star pitcher throwing strikes again, this article hopefully will serve as a reminder of correct trade-in practices to get us all back on track.
Before Accepting a Trade-In Vehicle
The goal of the dealer should be to gather as much information as possible about the history of the vehicle before offering on it. And in fact, many problems concerning trade-in vehicles that we hear about could have been prevented if the dealership went through proper procedures before accepting the vehicle on trade. Accordingly, here are some recommended actions for dealers prior to agreeing to take a vehicle on trade:
- Inspect the Vehicle. Let’s get the most obvious one out of the way first. You should never accept a blind trade, and you should always take your time and thoroughly inspect the vehicle, both inside and out. How are you able to accurately value a vehicle without looking at it first? Also, there could be defects or problems with the vehicle that can significantly affect the vehicle’s value that can be revealed with a proper inspection.
- Run and Review both an NMVTIS and Vehicle History Report. A NMVTIS (National Motor Vehicle Title Information System) report contains information on vehicle title brands, odometer readings, and information from insurance companies relating to vehicles deemed “total losses.” In other words, this report can provide you with useful information in helping value the trade and/or determining whether you should pass on it. Not to mention, and as you may be aware, running an NMVTIS report is required by California Vehicle Code section 11713.26 prior to offer a used vehicle for sale, and so running one at this point in time can kill two birds with one stone. Along this same line of reasoning, your dealer should also obtain a vehicle history report, such as a Carfax or AutoCheck, for the trade. Vehicle history reports provide detailed information concerning a vehicle’s title history, odometer record, prior usage (e.g., lease, personal or prior rental), prior accidents/damage, theft history, pending recalls and more. Again (you may be seeing a theme here), running this report is important because the information can be used to help value the trade, or to determine whether you even want it. And remember to read these vehicle history reports carefully and make all required disclosures to the next purchaser.
- Run and Review a KSR (DMV Motor Vehicle Record). Perhaps it is indicative of the current low vehicle inventory climate, but we have had many recent calls about undisclosed registration penalties or secondary liens on trade-in vehicles (i.e., payday loans). Because of this, we highly recommend running a KSR for every trade. The KSR will provide the name of the legal owner, the registration status, and potential title defect information. It will also reveal whether penalties are owed on the vehicle and even whether the vehicle has been stolen. If registration penalties apply to the vehicle, the penalties must be paid in order for the vehicle to be registered to the next owner. Any trade-in offer should take any unpaid penalties into account, and if a secondary lienholder is detected, you may want to question taking in the vehicle on trade at all.
- Have the Customer Sign a Trade/Purchase Disclosure Form (LAWCA-96135). In a world where we are now trained to be skeptical about everything, it may seem odd, but you should also ask the customer about the prior history of his or her vehicle. If the customer discloses material negative information about the vehicle, you can take it into account when appraising the vehicle and pass along any required disclosures to the next purchaser, if you decide to acquire the vehicle. If the customer conceals material information by making a written misrepresentation about the vehicle, the form could potentially be used against the customer in a later civil action.
- Compare Information. After performing all the above steps, you likely will have quite a bit of information on the vehicle. An important step that should not be overlooked is to compare all of this information and to look for discrepancies. Make sure there are not any odometer discrepancies, such as if the odometer reading on the vehicle is lower than the readings reported on the vehicle history report or KSR. Make sure the overall appearance and condition of the vehicle generally matches your reasonable expectations based on the information in the vehicle history reports and the Trade/Purchase Disclosure form. These reports can also be used as a backstop in case you missed anything during your inspection or vice versa. Also, make sure the customer attempting to trade in the vehicle is the registered owner and has a right to transfer it. In this connection, also remember that the dealer should avoid accepting a trade-in vehicle from anyone other than a party on the contract for the new vehicle. For a more detailed discussion about third-party downpayments, please read “Downpayments from Third Parties.”
Things to Look Out For
Along with any discrepancies found while comparing information obtained on the trade-in vehicle, dealers should be wary of vehicles with certain registration/titling histories. Here are some things to specifically look out for:
- Dealers should avoid any imported non-certified foreign vehicle. Recall that an imported vehicle may be registered in California if (1) evidence is submitted to prove the vehicle cleared customs, (2) the vehicle complies with U.S. Federal Motor Vehicle Safety Standards, and (3) the vehicle complies with U.S. EPA requirements (if the vehicle has 7,500 or more miles) or California emissions requirements (if the vehicle has less than 7,500 miles).
- Dealers should also tread carefully when there are potential complex out-of-state titling issues. The safest bet in these situations is to have the customer get a California title in their name for the vehicle on their own before trading it in.
- Dealers must avoid out-of-state vehicles with under 7,500 miles on the odometer unless the vehicle meets California emissions standards. Please read our article “Revisiting the 7,500 Mile Rule” for an in-depth discussion on this topic.
The Trade-In Vehicle Checks Out—Now What?
After doing your due diligence and determining that you want to accept the trade-in vehicle, here are some other things to consider:
- Accurately describe the trade-in vehicle on the contract. Although this seems obvious, it’s worth remembering that California law requires that any retail installment sale contract include a brief description of the property being traded in toward the purchase of a vehicle, and the description should be sufficient to uniquely identify the trade-in vehicle. [Civil Code § 2982(d)]. The same goes for lease agreements in California as well. [Civil Code § 2985.8(c)(4)].
- Remember to have the customer sign the trade-in payoff agreement on the retail installment sale contract in order to preserve the seller’s right to pursue a high trade pay-off. Similarly, ensure that you add high payoff provision language in the blank box of your lease agreements (assuming that the lease agreement does not already have such language embedded into it) and have the customer sign or initial this payoff adjustment agreement.
- Do not provide over-allowances on trade-in vehicles, since depending upon the circumstances, the consequences for doing so range from losing money on a transaction to illegally hiding negative equity, to illegally increasing the sales tax and Vehicle License Fee collection if the “hit” of the over-allowance is minimized by increasing the selling price of the vehicle. Avoiding over-allowances is especially important in circumstances where customers are to retain equity, as this could be challenged as a dealer rebate or unlicensed lending activity.
- Bullpen the trade-in vehicle. For a detailed discussion on how to bullpen trade-in vehicles, please refer to “What’s Hot on the Hotline? “Bullpenning Trade-In Vehicles.”
- Remember to have the customer sign the trade-in payoff agreement in order to preserve the seller’s right to pursue a high trade pay-off.
- Remember that lease returns are not trade-ins and should be treated differently. It should be made clear in initial communications with the customer whether the vehicle is being treated as a trade-in or a lease return. If the vehicle is to be a lease return, it must not be disclosed as a trade-in on the contract.
We know that these times are hard, and everyone everywhere has been affected by this global pandemic. We are all in this together, and this too shall pass. Hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or firstname.lastname@example.org. We are here to answer any questions you may have.