An internal rate of cash-on-cash return above 15%; and
The unfettered use of a car that will not depreciate for 2+ years.
Even if you didn’t do what I did, you can still profit from Dieselgate and “win” a free* car along the way. I’ll outline how.
And I’ll describe how I generated big utilitarian-augmented profits, with minimal effort and risk – approaches that can be applied elsewhere.
My beautiful, used ATM on wheels is a great machine. It has:
Nice features like a panoramic power sunroof.
Euro-taut handling and punchy pickup.
Enough stowage to mount an expedition across the Serengeti.
Observed MPGs in the high-30s.
A rear bench that folds more ways than a yoga instructor.
When new, our farfegnugen stickered at around $27,000.
In summer 2015, it would have gone for about $12k.
Post-Dieselgate, after owners knee-jerked their TDIs to used car lots, I got it for around $10k.
You might be thinking: $10k’s not a totally screaming deal for a used car like that. A good deal, maybe, but not fire-sale awesome.
Couldn’t FL have gone cheaper?
Yes and no. I decided several criteria would have to be met when I sprung for a TDI.
The criteria were designed to give us maximum flexibility as well as acceptable profit. Remember: In April I only knew we’d entered a special situation in which there was the likelihood of profiting.
Without the particulars of the settlement, there was uncertainty.
I wanted good outcomes under various scenarios – i.e., we’d use the car for a while before executing the buyback; or, if the better deal turned out to be the repair, we’d keep a car we’d be good with post-repair; etc.
So the car needed to provide:
Excellent utility and efficiency.
Long remaining life.
No-to-low maintenance expenditures.
Acceptably low initial entry price.
Opportunity to finance (more on this in a bit).
I also wanted the make and model that, based on data available in April, had suffered the largest percentage value decline since the news of Dieselgate broke.
I figured any buyback settlement would have to reflect the pre-impacted price of the car. As with stocks, big declines lead to big profits.
As of April, that make and model was the 2009 VW Jetta SportWagen TDI. Its value was down roughly 20%. The SportWagen model also fits our family’s utility needs perfectly, even excessively.
So that’s where my search started: make/model/year.
I winnowed the field from there.
Miles had to be low so the car could last us a while if so desired. This one has around 75k. For a diesel, that’s barely broken in.
Low miles also mean the car’s unlikely to have serious maintenance needs in the near term.
The car had to have met all its normal maintenance appointments and never been in an accident. It had to have a clean title, etc., etc.
Ours ticked those boxes.
The transmission had to be a manual. TDI automatics need major maintenance around 85k miles. Not the six-shooter.
So we got a manny-tranny.
New-ish tires were a requirement since a new set can run a few hundred bucks. This one came with nice shoes and pre-fitted tire chains for wintertime hauls.
Which is a super life-efficient car for the Libre family’s everyday needs.
And it’s now a full-blown ATM on wheels.
Running with the Numbers
Here’s a breakdown of the settlement calculations along with LibreWagen’s numbers. Note: Rube Goldberg himself couldn’t have devised or more complex approach to all this.
For any affected vehicle, VW will either buy back the car or repair the emissions cheating mechanism (if possible) at the owner’s discretion. Regardless, the owner is entitled to a “restitution payment.”
The buyback value reflects the NADA September 2015 “clean” value in the owner’s geographic region plus restitution.
The idea was to give owners the value of their cars before news of Dieselgate broke, plus some extra cash.
The restitution payment is roughly 20% of this NADA value plus a little under $3k. But in no event is the restitution payment less than $5,100.
So, if the owner chooses to sell the car to VW, the amount received will be the NADA value plus at least $5,100.
If the owner elects to repair the car, VW will perform the repair free. And the owner walks away with the restitution payment of no less than $5,100.
But, the restitution payment may have to be divided between the current owner and the owner as of September 2015. Since I didn’t own the car in September 2015, my restitution payment is cut in half. One half, $2,550, goes to me. The other half goes to the person who owned the car as of September.
So my car’s buyback value plus the full restitution is a little over $15,250. After splitting the restitution, I’ll be entitled to around $12,700.
I’ve provided the relevant calculations in the following table.
That’s pure profit of nearly $3,000 on my investment – which includes all applicable taxes, titling, registration, etc. All in.
I mentioned I wanted to be able to finance the purchase. This is why.
Yes, auto loans are idiot debt.
Yes, I took a loan on this purchase.
But this wasn’t just any car purchase. This was a bona fide investment.
And I wanted to leverage the investment.
I’ve got a nearly perfect credit score, which entitled me to pretty good loan terms. They’d have been better on a younger car, but still pretty good – especially with zero cash down. Which made leveraging useful as a practical matter.
In arbitrage and special situations with stocks it’s common to leverage up because it amplifies your returns. So I used that strategy here.
Consider if I’d paid $10k out of pocket and turned around and immediately gotten my $12.7k. That’s a 27% return. Not too shabby.
But with leveraging, I pay around $190 a month for the car. If I turned around right now and picked up my $12.7k, my return would be about 150%.
This amplification effect works both ways, though.
Leveraging goes in my favor here just as much as it goes against buyers in 99% of all auto purchases.
The Best Fit Plans
Some sharp-eyed Luchador out there has been stroking on the old abacus and is wondering why I don’t sell the car back ASAP. That would maximize my IRR and put sweet cash in my bulging pockets.
That Luchador is right.
But there’s more to the story here.
Basically, for as little as we use it, the Libre family still needs a car for utility, adventure and the occasional Costco run.
Owning a car guaranteed to not depreciate is like finding a leprechaun under a pile of winning lottery tickets.
I have until December 2018 to turn the car in for buyback or repair. Until that time, my buyback value is essentially static. Depending on the added mileage in the meantime, it could slightly rise, but, given the Libre family’s low annual driving mileage, it won’t go down.
In the meantime, I can use a car I don’t have to worry about.
Grocery cart dings a door? Don’t care.
Dog or kid vomits in the backseat? Whatever.
Seat trim gets snagged? Eh.
Condition doesn’t matter for the buyback. So until something breaks that bothers me and has to be fixed and is expensive to repair, we’re good.
Even better, the car’s costs of operation are incredibly low. The MPGs are hard to beat, and diesel often costs less per gallon than gas.
At, say, 36 average MPGs and diesel around $3.20 a gallon, we’re talking operating costs per mile of under 9 cents.
Auto insurance is dirt-cheap.
The car’s easy to work on – I already replaced a brake light lamp for $3 in about 2 minutes.
And the next major checkup is about 10k miles away. With the amount we drive, we’ll probably never get there.
So we’ll keep it until late 2018. Then turn it in for our $12,700+ and roll over into a full electric or maybe – hopefully – abandon cars altogether.
There’s also a mild tax benefit to delaying redemption since my “earnings” on the deal won’t accrue until 2018, as opposed to 2016 or 2017.
Does waiting drop the IRR to around 15%? Yes. But there are lots of benefits that calculation misses that more than make up for the “loss.”
Is all this ethical?
Absolutely. (And, yes, it’s all entirely legal, too.)
First, the purchase itself.
The purchase met the standard of willing-buyer-willing-seller under symmetrical information.
I bought from a dealer. (Remember: I wanted easy financing.) They knew at least as much about the car/market/settlement as I did.
I took a gamble in April, based on publicly available information, that the car’s value would rise.
I turned out to be right. But I could just as easily have been wrong.
That’s why I hedged and bought a car that met my various multi-scenario criteria, including meeting my family’s utility needs.
Is it ethical to continue to drive a “polluting” automobile?
Here’s my view. Under all circumstances, this unrepaired car would remain on the road for some portion of the future, continuing to pollute.
TDI owners don’t ever have to turn the car in or get it repaired. They can just keep on driving forever without doing anything (in most states/regions).
We’ll turn it in before the end of the claims period, so we’ll get it off the road, whereas other owners might not.
And the Libre family drives way, way less than the average American. Average annual miles in a passenger car are around 12k. We don’t get anywhere close to that.
We do maybe – maybe – 3,000 miles a year.
So, by keeping the car in our stable, we’re reducing the pollution output by roughly 75% until turn-in.
I’m not looking for a gold star or anything, but we are responsible stewards of our resources here – and that includes the air.
How You Can Profit
If you want to profit from Dieselgate and get a free* car, the process is simple.
Step 3: Determine how much you’re willing to let the car “depreciate” under your care.
If the relevant buyback value (including one-half the restitution) for you would be $13,000, you’re guaranteed that amount of money no later than December 2018. That’s the future value of the asset.
To some, it might only make sense to buy a car for less than or equal to this buyback value. (Be sure to account for tax, title, and other costs.) This nets pure profit or, at least, a free* car.
To others, it can still be valuable to purchase the car for more than the buyback value.
That’s because, if the purchase price is not much higher than buyback value, your rate of depreciation on the car will be exceedingly low.
It’s relevant to compare the cost of ownership of the TDI against alternative vehicles.
If the TDI cost of ownership is lower at a given purchase price than the next-best alternative ride, you’ll still profit by the amount of “saved depreciation costs.” And in the meantime, you get to drive a very nice and cost-efficient car.
Step 4: Negotiate a deal.
Who would sell one of these TDIs now that the settlement has been outlined and is heading toward execution?
Well, take me, for example. If someone offered to buy LibreWagen for, say, $13,500 cash, I’d have to think about it.
That’s more than I’d get for the car via the buyback.
To the prospective buyer, the car would still be attractive at that price because it would have very low depreciation prospects – only around $800 over two years. Which is unheard of.
So there are mutually-beneficial deals out there.
The overarching moral of this story is much broader than how to make a few grand arbitraging a special situation.
If you’re willing to look and act, there are millions of dollars out there to be made with very little effort and minimal risk.
Whether in the stock market, used car lots or P2P loans, wily Luchadores can make serious bank. Just like we did here.
Update: The latest about Dieselgate, LibreWagen and the Ultimate Free Car Deal can be found here.
Luchadores, tell me your TDI story. Are you an owner, former owner, future owner? Are you enjoying your ATM on wheels? How much above buyback value would you be willing to pay for one of these?
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