Whenever someone tries to explain what arbitrage is they invariably come out with an analogy of buying a car for some amount of money and selling it for more money. If they’re being particularly chatty they may even extend the example to a time where you already have a buyer lined up and who may even have paid you before you buy the car. But does that ever happen in real life? Well in November 2011 we decided to give it a go.
First off we need a buyer and seller who place a different value on the same car. A simple example could be a car dealership who buys all their cars from an auction house, they then clean the car up and wait for a customer to come along who they can convince to buy the car at a substantial markup.
Another example would be a company like ‘webuyanycar.com’. They buy your car off you for a price they know they can sell it straight on and make a profit.
Both of these businesses are in very competitive crowded markets, where a lot of other people are doing the same and on top of that they also require a lot of money up front for purchasing and repairing the vehicles, for space to store them, and for the hours needed to man and sell/buy the cars. Last thing we want to do is to plow all the profit from our hard earned into a business venture in a market we know nothing about! Is there a way to do it with smaller upfront investment and with hardly any risk?
Once upon a time people could buy cars in an auction in Scotland, drive them down to London and sell them for a profit in the auctions there. That sounds like a good idea, your total costs are the one car you have purchased, the cost to get down to London and the auction fees. Also, you only hold onto the car for a short amount of time reducing the risk of anything happening to it. Unfortunately as with a lot of these arbitrage opportunities the more people who do it. The smaller the margins get until they’re just not worth it anymore. Currently, the price difference between the Scotland and London car markets isn’t big enough to cover those intermediate costs. Are the margins big enough if we look further afield?
What about, say, Malta?
- They drive on the left-hand side of the road, just like the UK, so the cars are identical.
- Used cars sell for a lot more than in the UK.
Sounds great, an identical product selling for much more money just because it is in a different marketplace. Is the price discrepancy big enough for us to make money with all the logistical and taxes? Before diving in we hit google to do some research.
Seeing as we know almost nothing about cars we teamed up with someone who did. Rick has spent most of his life in and around car dealerships, he was born in the UK but in November 2011 lived with his girlfriend in Malta. He was working with us on another project and could easily do this at the same time. Perfect. Our deal was that he would own 50% of the company.
Although it sounds very complicated, exporting cars from the UK to Malta is just a logistical problem, and one that has been solved by other people many times before. We weren’t doing anything new – in fact all we needed to do was to put together the pieces of the supply chain jigsaw, get quotes for how much each stage would cost and if it worked out then do it. Simple steps that work regardless of where you are building the business. It would have been the same if we wanted to sell cars in Timbuktu (please please please tell me how you get on if you start exporting to Timbuktu!).
Sort out reliable sources to regularly buy used cars at a decent price.
By introducing ourselves to some car dealers in the UK, we were able to get on their lists of potential buyers willing to take their part exchanges off them. They generally can’t put these cars on the lot so are looking for a quick sell. This should get us cars at a slightly cheaper price than we would from auction or private purchases provided we were willing to make a decision on whether to purchase off the back of a phone call. Great – last thing I want to do is travel around the country looking at cars.
Sort out transportation.
We contacted a few transportation companies and freight forwarders here in the UK to get quotes on exporting vehicles from the UK to Malta. This was also an opportunity to pick their brains for any tips. In our experience they’re normally very helpful – after all they are trying to win our business and once they get it, it is in their interest for us to stay in business. We came to an agreement to pay €1,000 per car door-to-door to Malta. The transportation time would be about a week.
Work out the import duty and customs processes in Malta.
Again this sounds very complicated and daunting but an email to our Maltese accountant very quickly got all the answers. For €600 he sorted out all our tax and import costs plus registered a company to run the business in Malta. You could always do it without a company as a sole trader and save on some costs until you are selling enough to make it worthwhile. Contact a Maltese accountant for advice (don’t worry they all speak perfect English and it’s in their interest to help you out). It turned out the costs per car would be:
- Import duty varied from vehicle to vehicle, but to calculate how much import duty would be you need to enter the car details into this website. How surprisingly simple, no complex equations and it’s all in English.
- Road tax, circa €242 a year but depends on the car.
- A Maltese MOT which is €20.
- Some other smaller costs such as buying number plates which come in at about €100.
- Plus a bunch of paperwork, but the accountant was able to teach us all we needed to know.
Find a buyer.
There are plenty of people who could buy a car off you, from your average Maltese person (sometimes known as a Malteser) to second-hand car dealers. There are even agents who can find you customers for a fee.
To help us sell to retail and look more reputable to dealers, we built a website. 90% of customers in Malta use the web when searching for a car but the quality of the other car dealers’ websites are terrible so we thought we could build a distinct advantage through having a tidy, good looking website with some strong search engine optimisation.
The website cost us, including hosting and copywriting, about £250. We mocked it up in photoshop and asked people to bid on the project on oDesk. I love ODesk: a great way to find someone who can do a job better and cheaper than you.
Run the numbers.
We now have a formula:
(how much we sell it for) minus
(how much it cost to buy) minus
(how much it costs to transport) minus
(import duty) minus
(road tax) minus
(Other costs such as plates, paperwork)
Here is the example we ran.
2008 118d on autotrader for £7,000 with 70k miles approx. (€8,400 euros)
We have to get the car shipped to Malta – door-to-door €1,000
Import duty €1281
Road tax €242 for a year
Mot €20 and that lasts for 2 years
Plates and other small doc fees €100
On Autotrader Malta the cheapest 2008 118d was going for €15,200. Even if we end up with €1,000 euros of extra costs we’re still making €3,000 profit.
How did it work out in reality?
First off our startup costs, we tried to keep them as low as possible. When doing a project like this I like to get it profitable and get any initial investment out as quickly as possible. If you spend a lot to begin with it makes it much harder to make profit and can be extremely stressful as I found out first hand with ETAdvisor (a post for another day).
|Accounting||500||Setting up the company and getting lots of advice on import duty and VAT|
|Website||300||Hosting for 1 year and the website development|
|Flights||400||Rick flew to England so we could set up the venture. He was already travelling to the UK to visit family but let's include it here anyway.|
Attempt 1. Sell through an agent
We were able to buy a 2007 BMW 118d for £6,500, slightly older but slightly cheaper than the example above. The all in cost of getting it to Malta was €10,100. The way agents work is that they act as affiliates, they find you a customer and take a commission without ever having to put any money up themselves. One of the agents we contacted found us a buyer who was willing part exchange the BMW for a old Citroen and €7,300 cash. The agent’s commission was €1,150 and he would also buy the Citroen off us for €5,000 or we could keep it and try and sell it for more. If we had sold the Citroen we would have made €1,050. Which is pretty good for such a straightforward process.
Each step was outsourced except the very last step of Rick taking the car from the port in Malta to the buyer. Literally the first time any of us saw the car was when Rick picked it up in Malta.
We decided to keep the Citroen and 10 weeks later sold it for €5,750. Which is another €750 profit but required 10 weeks of storage and other costs, and meant Rick needed to work at finding a buyer. On the plus side he used it as his car for 10 weeks. The total profit was €1,800.
Attempt 2. Sold retail
Our next purchase was a 2011 Mini Cooper for £8,435. Once it arrived in Malta we put it up on our website, posted some adverts on a few popular websites, Autotrader Malta (€10) and Maltapark (€15), and waited. We got a lot of interest quite quickly, but we soon learnt that it is quite rare for people to buy cars outright for cash in Malta. They either want it on credit, which is hard to do as it is against the law in Malta to offer loans with interest, or they wanted to part exchange it for another car (or sometimes a house! – Check out this email).
After about 6 weeks Rick managed to shift the Mini, directly swapping it for a BMW Z4 which, although it was a great deal, only added to our problems. If people couldn’t afford the €19,000 we were asking for the Mini they definitely couldn’t afford the €21,000 we wanted for the Z4.
After another 6 months we eventually swapped the Z4 for a Peugeot plus some cash, and then sold the Peugeot bringing the total received to €20,000. After all our costs that was a comfortable €5,028 profit from the Mini.
Attempt 3. Imported ‘to order’ fore dealers
We were asked to source a BMW 5 series. Rick made some calls and found a BMW 520m which he was able to buy for £7,500 – (about €9,000). The dealer paid €10,810 up front, so after shipping and assorted costs we made €760 profit. We didn’t need to register it or pay the import duty, the dealer did all that. Although this route made us the least amount of money it was by far the easiest and had no capital requirements for us.
Profit and the future
So from our three experiments we made:
|Strategy||Price (EUR)||Shipping||Tax, plates, MOT, other||Total Cost EUR||Total Sold Price||Profit||Work Required||Time Required|
|BMW 1 Series. Sold through an agent||€7,800||€1,000||€1,300||€10,100||€11,900||€1,800||A few phone calls, two face to face meetings.||2.5 months|
|Mini Cooper. Sold directly to retail||€10,122||€1,000||€3,850||€14,972||€20,000||€5,028||Lots of phone calls, multiple face to face viewings.||7 months|
|BMW 5 Series. Sold to a dealer||€9,000||€1,000||€50.00||€10,050||€10,810||€760||A few phone calls, one face to face meeting.||3 weeks|
Well it was profitable, we made €6,388 after all the startup costs. On top of that the company we set up now has some value to it. Even though it doesn’t own any cars it now has the systems, legals and contacts in place to do more if we want to. For the number of hours put in that is a pretty good return, we probably put somewhere between 50 and 100 hours into the project and it was all managed while working full time on other projects. But compared to the amount of time that passed from the start of the project till the end it really wasn’t that good a return; six cars passed through our hands but it took us a long time to convert those cars into cash. In that time a lot could have happened or changed which could have put our profit in danger.
There is a lot of potential for importing cars to Malta if you wanted to dedicate a decent amount of time to it and really run with it. It has low upfront costs (although it will need more than we originally thought due to the time between buying and selling), it is proven to be profitable and can be scaled up in a few different ways:
- You could go down the route of selling cars wholesale or very rapidly to dealers. With our current costs you can make €500 a car but with scale comes cost saving, for instance you could work on really bringing down your transportation costs. If you booked a 12 car carrier full with 12 cars you could lower the costs from €1,000 down to as little as €600 a car. That would immediately almost double your bottom line.
- You could start a dealership and sell to retail. There is a much higher profit (3,000 euros plus a car), but you need somewhere to store the cars and be willing to hold them for decent amount of time before the right buyer comes along. We looked briefly at renting a 12 car garage in Malta and you can get one for about 600 euros a month.
But before you dive in check out some of the other arbing projects I’ll be uploading to this blog. There are some great ones that have made a lot more money for a lot less work. Sign up to the mailing list to be the first to hear about them.
Do you have any experiences in buying and selling automobiles either at home or abroad? What could we have done to increase our margins or are there any glaring mistakes we made? Any advice or feedback would be very welcome!