When it comes to calculating the trade-in value of construction equipment several factors go into the final offer.
Condition, hours, make and model, application, demand and supply all enter the mix. Additional considerations include timing, locale and dealer-specific internal factors, such as rental fleet machines coming up for disposal.
“Determining resale value is definitely an art,” says Dennis Howard, vice president fleet and remarketing, RDO Equipment. “To the guy trading the machine in, the number is never good enough, and to the guy who’s buying it, the price is always too high.”
That’s why Heath Watton, vice president, Southeastern Equipment, urges contractors to do their homework.
“There are plenty of sites out there where you can look at the historical pricing data for the make and model you want to trade in,” he says. “You need to understand the true value of your equipment. I want us to talk real numbers together.”
This homework needs to center on current prices for the make and model, usually within the past 90 days, because equipment pricing ebbs and flows. What was hot a year ago may be in the doldrums today and vice versa.
“If the industry says it’s worth $30,000, I can’t give you $40,000,” Watton continues. “If you’re a realist, you’re never going to be surprised by your trade-in value.”
Prepping for the trade-in
It could be argued that getting the best price for your trade-in begins when you buy a machine.
This includes what you buy.
Savvy buyers know which machines retain their resale value, Watton says. “When you understand what the market values, it will help you at resale. Just note what’s going on around you.”
Single-owner machines with documented service records, invoices for work done, and features such as an air-conditioned cab all add value at trade-in. “Guys may think they’re saving $3,000 on the front end by not putting in a cab when the reality is that, on the backside, not having that cab might cost you $4,000 to $5,000 in value,” he says.
The more information the better, including a fluid sampling history, service or preventive maintenance contracts and any internal maintenance records.
“Look at it through the eyes of the next owner,” says Tim Eldridge, used equipment manager, Carter Machinery. These records speak volumes about how a machine has been treated.
A great reputation for taking care of your equipment can also mean more money in your pocket.
Word spreads when a certain local contractor with meticulous maintenance practices has traded in a machine, Watton says. “I’m giving him the top end for his machines, no questions asked. People will jump on them.”
Condition, condition, condition
Know the true condition of your trade-in.
There are cosmetics and then there are things that matter. Our experts say the dings and dents of normal use are usually not a concern. “It doesn’t have to be painted, but you should be taking care of the visible items such as rust, cylinder and hose leaks, cylinder rod scoring, etc.,” Watton says.
“I can deal with dents and dings, but when it comes to sticks or booms being damaged and welded on, you can get into some expensive repairs,” Eldridge says.
Such factors are determined by an inspection, which is core to calculating trade-in value. Contractors need to look at their trade-in the way the inspector will: no emotional attachment (this especially applies to owner-operators) or explanations for something not working quite right.
“Take your rose-colored glasses off,” Watton says.
“Inspections give us the ability to articulate to the next customer what we’re seeing and what will add or detract from the trade,” Eldridge says. They should be a list of facts: Is it clean, running, dry and straight?
Photos need to be taken from all four corners, as well as the engine compartment, hour meter, cab, linkages, tracks or tires, etc.
Videos that show the machine starting, gauges operating and cycling through basic functions are gaining traction in inspections. “They need to start the inspection with the tractor cold and finish with it at full operating temperature,” Howard says.
“I want to fire it up, check every button and gear,” Watton says. “I want to see it do everything it’s supposed to do.”
Inspectors typically judge the condition of a used piece as “very good,” “good,” “fair,” “poor” and “scrap.” Even a scrap determination can have a component salvage value.
Some replacement items identified in an inspection can add up, such as a worn dozer undercarriage, damaged C-frame or cab.
Howard advises dealing with worn tires and undercarriages before trade-in. “The cost to replace undercarriages and tires is inflated in people’s minds, so you might as well address it,” he says.
In addition to looking at general overall condition, inspectors will note the machine’s configuration, such as whether an excavator comes with a non-standard track or with any attachments.
The inspection will also detail any technical add-ons such as an integrated GPS system, which can add value. “Just as there’s a residual on the equipment, we’re looking at the residuals of the digital pieces because they are expensive additions,” Eldridge says.
Telematics information can become a factor in machine assessments. “With telematics, we get a lot more history than we’ve ever had before,” Howard says.
For insight into an inspection, Watton has put together a series of videos reviewing Southwestern Equipment’s inspection process on a variety of machine types.
What’s happening on the dealer side
Every machine needs an exit strategy. “We’re selling vegetables, we’re not selling wine,” is how a mentor explained the used equipment market to Eldridge.
“The dealer doesn’t really truly make the full deal until the trade is sold,” Eldridge says.
For a dealer, the easiest trade is a known customer with a known machine that has a ready market in a dealer’s territory. Such a trade-in can generate a higher value.
“We need to identify what we want to do with the tractor,” Howard says. “Can we quickly sell it back into our market or will we have to use different methods of disposal?”
“To be honest with you, the very best pricing guide is our own sales history,” Eldridge says.
In addition to their local market knowledge, dealers can examine several valuation sources to help determine the price they offer by looking at sales prices of comparable machines, both at auction and retail. Dealers filter for models, hours, location, sale date, application and condition. Then they juggle this data with their market experience. For example, a dealer may have a machine at a certain asking price but typically accepts 15% less.
Throughout the years, dealers have honed the sources that work for them, but big data and the internet are changing the game. “We have to use more sources than we used to,” Howard says.
Howard limits his lookback on pricing to 90 days, although sometimes that can be pushed back to six months to get enough data on a certain machine.
“Everyone wants it to be like the auto industry where they have NADA [National Automobile Dealers Association] Guide, so they can know what the tractor’s worth,” Howard says, “but while we’re better than we used to be, we’re not there yet.”
For more common machines, dealers typically want it off their lot within 90 days. A specialty machine will likely hang around longer in the search for a buyer. If a dealer doesn’t have to keep a trade-in on his lot long, that adds to its value.
Agreeing to a price
The objective in trade-in negotiations is to reach a price both parties agree is fair.
Some upfront dealer-to-customer questions will include: What is your timeline? What’s your budget for a replacement machine? Do you want to trade in or consign the machine?
Dealers know they need to stick to the facts in these conversations: “Here’s what comparable machines sold for in this market. Here’s the likely resale value. Would you be satisfied with the offer?”
Instead of a trade-in, contractors may choose to consign the machine in hopes of getting a higher price. For a fee, the equipment is transferred to a dealer lot, posted on both the dealer’s and used equipment syndicated websites, and the dealer handles buyer inquiries.
Remember that dealer selling costs are part of the equation, from doing any pre-sale repairs, to marketing it, to keeping it temporarily on the books.
Other forces can factor into trade-in values.
“Markets can move pretty quickly,” Howard says, such as when the Covid-19 pandemic first hit last spring. “It dropped really fast and then came back fast. Now it’s kind of leveled off.”
But while there used to be concerns about the pricing impact of Tier 4 machines in the used market, it’s not as much of a factor as it was four years ago, Eldridge says. “It’s just not new anymore; it’s everywhere.”
In fact, dealers have seen the flip side; a California customer was interested in a Tier 3 paver, but state laws prevented him from buying it.
As always with the used equipment market, how fast new machines are moving out of factories can affect pricing. If new machine demand can’t be met, buyers may turn to low-hour used equipment, and used prices can increase, as well as trade-in values.