Start-ups tackle the doubts and fears of buying a used car

SAN JOSE, Calif. — Silicon Valley is grabbing a piece of the used-car industry with technology that makes buying a car a matter of a few clicks on a smartphone.

Launched in the past two years, start-ups Shift and Beepi, Phoenix's Carvana and a few others have put used-car buying online, where deals can be struck and financing obtained in minutes, with the car delivered to your door.

"A lot of things can be done to positively impact how cars are sold in the U.S.," said Valentin Gui, co-founder of Instamotor, a San Francisco start-up that has an app that connects sellers and buyers, performing digital checkups to root out fraud and other problems. "There are so many things you can do with technology to improve on that."

The used-car business — estimated at $640 billion to $700 billion in 2015, according to IBISWorld's 2015 industry report — has changed little over the past 50 years.

But change is coming. By using mobile technology and algorithms that accurately predict how much a car will fetch and business models that keep overhead much lower than that of dealers, the new ventures say they can get a better deal for both sellers and buyers. They also emphasize transparency and value with seven- to 10-day returns with no questions asked.

I got a firsthand look at a mobile technology-driven car purchase a couple of months ago as my son was browsing Craigslist for a pre-owned car, encountering some of the usual problems. The first car he found wasn't registered in the seller's name. The next one was 30 miles away with a different prospective buyer coming in a half-hour. A dealer had one listed, but it hadn't been detailed yet and wasn't immediately available.

Then he found a Prius on Craigslist that was advertised by Shift for its owner, someone who lived in San Francisco. A Shift "car enthusiast" (that's an official title) drove the car to my house in Palo Alto, Calif., from Shift's lot in South San Francisco. Shift's enthusiast went over a 200-point inspection of the car by the company's mechanics. After a test drive, my son bought it, signing the papers in my living room.

"We are very much not a dealership," said Minnie Ingersol, Shift's chief operating officer and a former Googler who managed the launch of Google Fiber. "We're a peer-to-peer marketplace. We don't have a retail showroom that our customers ever come to. We don't have a lot of overhead a dealership might have and we also never own the car. That allows us to pass on savings to our customers."

After years of online start-ups trying and failing to capture a piece of the huge U.S. used-car market, 2013 seems to have been the magic year, said Ernie Garcia, a Stanford engineering graduate who founded Carvana in Phoenix.

"It's an absolutely massive market, but some customers are actively dissatisfied and our view was that technology was the solution," Garcia said. "It's rare you find an industry a trillion dollars in size where consumers have been actively asking for something different for a very long period of time," he said.

Carvana buys cars from sellers, spends about $1,000 reconditioning them and then lists them online, delivering cars to buyers on flatbed trucks or in some cases, giving buyers the option of picking them up at a Carvana "vending machine."

A seemingly big hurdle — lack of a test drive — was easily cleared by Beepi, which has been growing at a 20 percent annual rate since its launch in 2013.

Pena looked at Beepi's reviews on Yelp. "All of their reviews were really, really good. The only bad ones were from people upset that their cars weren't accepted to be sold because of issues with the engine or the maintenance wasn't good. I thought, if they're so picky, the cars must be good," she said. "And if you don't love it, you can return it."

Beepi co-founder and CEO Alejandro Resnik explained how research he did while a student at MIT convinced him there was a huge market for online used-car sales waiting to be tapped. After an experience buying a used Jeep that caught fire, Resnik wondered why used-car buying couldn't be made easier by taking it online. The stumbling block was the test drive, he was told. Americans want to test-drive the car.

"Research showed people do test drives thinking they are assessing the car," Resnik said. "The reality is, there is nothing further from the truth. You cannot assess the quality of a vehicle with a test drive."

And Tesla showed that people are receptive to buying direct.

He surveyed 1,000 people. Eight out of 10 said they wouldn't buy a car without a test drive. "But when you ask, would they buy a car without a test drive if the car is inspected by a mechanic you trust, from a brand you trust, with a 10-day money-back guarantee, only two say no."