Minnie Ingersoll’s San Francisco startup Shift looks and acts like an online used car dealer. It advertises cars for sale on its website and makes money when one is sold. But if you ask Ingersoll what Shift is, she insists, “We’re not trying to be a dealer.”
Venture capitalists have invested $23.5 million into Shift and millions more into a handful of similar startups seeking to revolutionize the way used cars are bought and sold. But like Uber, which revolutionized the taxi business while ducking taxi regulations, some of these companies avoid offering the basic consumer protections required of a dealer by claiming not to be one.
Each company is a little different, but most are based in the San Francisco Bay Area and all are founded on the notion of using the web to pair buyers and sellers in an efficient, peer-to-peer marketplace that eliminates the hassles and risks of buying and selling a used car.
“It is, on the surface, a great new idea, just like Uber taxi cabs,” said Larry Laskowski, the executive director of the Independent Automobile Dealers Association of California. But he worries consumers will face problems. “Everything is fine until somebody gets an eye poked out,” he said.
California law defines as a car dealer anyone who, in return for money, “exchanges, buys, or offers for sale, negotiates or attempts to negotiate” the sale of vehicles. Car dealers say they have complained to the California Department of Motor Vehicles that these online startups are endangering consumers by sidestepping the protections required of traditional operations, although used car dealers don’t typically enjoy good reputations with consumers either. Both car dealers and startup executives told FairWarning the DMV is investigating. The department refused to comment.
The startups are so new it’s unclear whether consumers have more problems with them or traditional car dealers, but there have been complaints of low-ball price quotes and registration snafus.
On Yelp, the online review site, a user named Aaron G. from San Francisco said Shift sold him a car without informing him, or even realizing, that the seller still had an outstanding loan. He said Shift asked him to front the money to pay it off, leaving him vulnerable if something went wrong or another problem emerged. “I would have paid for the car without becoming the owner,” Aaron G. wrote. Eventually, however, it was straightened out and he bought the car.
Another Yelp reviewer, jett s. of Oakland, wrote that a startup called Beepi registered his newly purchased car at his work address instead of his home and didn’t seem to care about fixing the mistake once the sale was made. He later revised his review, saying Beepi contacted him to apologize after he made his initial post to Yelp. “I would guess that my issues with them are simply growing pains, so I would now recommend them to someone with the caveat to not sign papers / pay for the car if there are any errors in the paperwork,” jett wrote.
Used car dealers are governed by numerous rules. Federal regulations require them to post warranty information on every vehicle for sale. California law layers on additional protections, including requirements for dealers to conduct a basic inspection of all vehicles they sell, to guarantee that the cars’ safety features function properly; to inform consumers of their right to obtain a third-party inspection; and to provide a vehicle history report from the National Motor Vehicle Title Information System, among other things.
FairWarning spoke with the executives of five startup companies. Two companies based in California – Shift and Instamotor – said they are not car dealers, and thus not governed by dealer regulations, although they noted they voluntarily provide some of the required protections, like conducting inspections or obtaining a vehicle history report.
The CEO of a third California startup, Tom Nguyen of Carkibo, said his company is a “peer-to-peer concierge” and “not like a car dealer,” but refused to respond when asked if it follows dealer regulations. He did say, however, that Carkibo was in the process of getting a dealer’s license to ensure that it wasn’t operating in a gray area.
Only the executives of Tred, a company based in Seattle, and Beepi, the largest of the online startups with $79 million in venture capital investments, called themselves car dealers and said they comply with all of the regulations required of one.
“It has not been an issue for us to abide by the dealer rules in Washington state,” said Tred co-founder and CEO Grant Feek, although he noted regulations do differ from state to state.
The startups have the potential to confuse consumers because their websites appear very similar to those of online car dealers, like Carlypso in the Bay Area and Carvana in Atlanta. Further complicating matters is the fact that these online companies seem to frequently change their operating models.
For example, Val Gui, co-founder of Instamotor, said his company initially performed all of the duties of a dealer and even had a dealer’s license. But he said the company found abiding by dealer regulations to be “too expensive for the value customers were getting out it,” and eventually decided to change its operating model to a peer-to-peer service.
Today, Instamotor just obtains a Carfax vehicle history report and a recall check, and conducts an inspection that includes the items required of dealers under state law. Unlike other companies, Instamotor doesn’t make its money directly from car sales. Rather, it generates revenue from referral fees if buyers purchase car insurance through one of its network of carriers.
The three other California companies profit directly when a car sells. Shift guarantees sellers a minimum sale price for their cars, then takes 50 percent of whatever the vehicles sell for above that price. Carkibo takes as much as a 5 percent commission from the sale price of cars sold through its service. Beepi guarantees sellers a price for the car, then charges buyers 1 percent to 9 percent more, which the company pockets as revenue.
Among the California startups, only Beepi says it is a car dealer while the other insist they’re not.
“Shift is absolutely committed to abiding by all applicable laws and regulations,” said Ingersoll, Shift’s co-founder and chief operating officer, in an email. “…However, given that Shift operates completely in the peer-to-peer market, the dealer-based regulations … do not apply to our operations.”
Ingersoll called Shift a car listing service, like AutoTrader or eBay Motors, which allow sellers to list a car and buyers to get vehicle information, along with access to services such as mechanical inspections. She said Shift conducts a 150-point inspection of the vehicles for sale on its site, but declined to respond when asked if that inspection covered the items required under the law.
Beepi co-founder Owen Savir, on the other hand, said the company’s 185-point inspection includes everything required of car dealers. “We think playing by the rules is very important,” Savir said, especially for a company like Beepi. However, under Beepi’s operating model, buyers don’t have the opportunity to test drive cars: the first time they see a car is after they’ve purchased it. Savir said the company felt that if it was asking buyers to take such a leap of faith, Beepi needed to offer the highest protections, included meeting all the existing requirements of car dealers.
“I can tell you that we chose the hard way,” Savir said. “It’s definitely easier to say, ‘I’m not a dealer, I don’t need to abide by the rules.’ ”
– See more at: http://www.fairwarning.org/2015/03/used-car-startups-do-a-wheelie-around-consumer-protection-rules/#sthash.1MVe7aot.dpuf