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Used EVs: How to navigate the tight market for pre-owned electric vehicles like the Nissan Leaf and Chevy Volt - Morningstar

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By Rachel Koning Beals

Congress has approved a bill that offers a first-ever $4,000 tax credit on previously-owned electric vehicles

Car and SUV buyers can now explore a first-ever tax credit for used and certified pre-owned electric vehicles, a conditional incentive that ideally pushes EVs toward mass-market uptake and not just a luxury splurge.

But in addition to tight supplies that make both new and used conventional cars and EVs harder to come by, consumers must consider time spent searching for inventory, battery range and degradation, a different maintenance schedule than they're used to and other factors as they look to replace Earth-warming vehicles routinely impacted by volatile gas prices .

Congress has passed legislation that devotes more than $360 billion to climate-change efforts, including a $4,000 tax incentive to use toward previously owned electric vehicles and a $7,500 credit for new EVs. The Democratic-run House approved the bill on Friday, and the Senate gave its OK on Sunday. The measure is now expected to get signed into law quickly by President Joe Biden.

Read: Thinking about an EV? First-ever $4,000 tax credit for used electric vehicles, and $7,500 for new, nears approval

Passage is seen as a major effort toward increasing access to EVs across income levels and using them for multiple purposes, sending one with a kid off to college, for instance, compared with premium EVs like Tesla (TSLA) and Lucid (LCID), which initially dominated the market.

In fact, more competition from used versus new offerings could benefit consumers. Pressure on auto makers to rush to meet market demand has decreased EV quality, a recent J.D. Power report says.

And car makers are increasingly considering wider price points.

"The addition of new EV models has moved the needle on consumer consideration," said Stewart Stropp, senior director of automotive retail at J.D. Power, pointing to surveys that show greater interest historically in EVs from premium car buyers. "In fact, several new models from perennial mass market brands are at the top of that consideration list."

Read: EVs can store power for our homes and the grid: Why 'vehicle-to-everything' technology is a must-follow investing theme

Clearly, this still-young market has its pros and cons. Here are some features of the used EV market to consider as you navigate a purchase.

Challenging search

The real challenge lies in finding that used EV, or really any car, right now.

Cars, trucks and SUVs, especially EVs, are now much less mechanical and more digital, which means issues for hardware and software are challenges for the auto market. A semiconductor chip shortage means fewer cars rolling off the production line, which in turn has led to a run on used cars to make up the difference. The result has been higher prices for both new (GM) and used cars. That's true of gas-powered vehicles and electric vehicles.

Foremost, many popular models are particularly hard to come by -- it can take several months from when you order to take delivery. Just ask all the individuals and businesses waiting on Ford's EV version of its best-selling F-150 pickup truck (F), the Lightning. Bosch, Europe's largest auto supplier, said it expects global bottlenecks because of a shortage of auto chips to continue into 2023. Although Rivian's(RIVN) stock gained when an analyst said the worst of the shortages may be behind it.

If you're particularly anxious to get into an EV sooner versus later, a search should be expanded to new and used options.

The top 10 fastest-selling used cars overall right now are split between hybrid and electric vehicles, with the Tesla Model Y topping that list, iSeeCars.com said On average, a used car will take around 52 days to sell, the industry research company said. The hottest cars, however, will average about 32 days and sell up to two times faster than the average used vehicle.

Read more: Tesla's Model Y is the hottest used car in the U.S. right now

Charging company EVPassport's co-founder Hooman Shahidi said access to widespread, quicker public charging (most owners currently charge at home overnight, or increasingly at charging provided by their workplace) and access to the vehicles themselves are what will boost growth in this market.

Shahidi said as car buying shifts away from dealerships to direct purchases, that can likely boost EV access.

"Dealerships across the board are making more money than ever before just purely because of supply and demand," he said in a recent interview with MarketWatch. "Direct buying is getting more enticing. I challenge Cars.com. I challenge CarGurus and True Car, make it easy for people to have access to that same experience with used cars, and specifically used EVs," he said.

A deeper and incentivized used market can only help, he says. That includes drivers for Uber(UBER) and Lyft (LYFT), whose margins can be improved by a gently-used EV.

Price comparison

The price of a new EV on average starts just below $30,000 and can easily surpass $100,000 on premium models. On the low end, a 2023 all-electric Nissan Leaf lists at $27,800.

Read: Ford hikes price on all-electric F-150 Lightning due to shortages, inflation -- here's how much the pickup truck will cost

"State, federal and manufacturer new car incentives were effectively lowering the starting price of EVs, which was then reflected in the used car market," says Ivan Drury, senior manager of insights for car-buying guide Edmunds, in a blog posting from the site. Historically, new, tax-incentivized EVs meant many buyers believed it was a waste of time to even consider a potentially outmoded EV that has already been driven.

But greater adoption can mean expanded minds. And this is where a used EV or a certified pre-owned EV might appeal: it's already in stock, it's less expensive, more makers are increasing the number of models, and EVs inherently have relatively fewer maintenance items to look out for compared to their combustion-engine brethren (more on that below). That can mean less worry around a previous owner's care. In general, certified pre-owned vehicles come with extra warranty coverage, lower interest rates for financing, and other benefits such as roadside assistance or loaner cars.

According to Cox Automotive, the average price of a used EV in the U.S. is $25,500, about right at the purchase-price limit for filing for the used-EV tax credit. Remember, that's the average. Lower-cost EVs exist.

The tax credit nearing approval is worth either $4,000 or 30% of the auto's price, whichever is less. And the price cap of qualifying vehicles is $25,000.

Those purchases, in addition to the bill's language around new EVs, come with income caps as well: Individual tax filers must have income below $75,000 to be eligible for the credit. That cap is $150,000 for joint filers and $112,500 for heads of household.

How will you use your EV?

EVPassport's Shahidi says it's critical to understand how you'll use your EV and how you'll charge it. And that question automatically leads to understanding range on a battery charge, which is usually less the older the car is. Is the intention only for work commutes? As a backup car? For the next cross-country trip?

"You'll find that earlier electric vehicles such as the original Nissan Leaf , Ford Focus EV, Kia Soul EV , Chevrolet Spark and Fiat 500e will be less expensive and can make for a bargain commuter car, but there's a reason why those prices tend to be low," says longtime auto-industry writer Ronald Montoya, in a posting for Edmunds.

The EPA range on a single charge on those early EVs was typically between 75 and 115 miles when they were new, and the real-world range is likely less now due to battery degradation. The 2015 Nissan Leaf, for example, had an EPA-estimated 87 miles of range. By contrast, the 2022 Leaf has a range of 215 miles with the larger optional battery.

"Most people aren't comfortable with those smaller ranges, especially if you don't have a charger on the other end of your trips, which would effectively cut your range in half. But if you can make peace with the limited range, or have a second car for longer trips, these cars can make for a great daily driver on the cheap," Montoya said.

Additional questions: Do you have a place to charge an EV? Is the plug rated at 240 volts? Is the wiring in your home old? If so, you'll likely need to hire an electrician to help with an upgrade. The charging station itself can range from under $200 to more than $1,000 before installation. Installation costs can vary tremendously based on electrician labor rates and the extent of rewiring required: Qmerit puts installation and rewiring costs in a range of $799 to $1,999.

Related: Buying a home? Why you should ask whether it's wired for electric vehicles even if you don't own one

Plus, public charging stations are formatted differently and can be exclusive to membership on certain apps. So do some research on those chargers you're likely to frequent. Some stations charge by the hour as opposed to the kilowatt-hour, which can add up over time.

Consider all these expenses in weighing the attractiveness of your used EV pricing.

Outdated technology and battery life

Modern EVs (dating from around 2011) haven't been out long enough to accurately judge how long their batteries will last, says Montoya of Edmunds. If you're the second buyer, you may not know the car's charging history and the effect that's had on the battery. For instance, allowing batteries to often run very low can cut down on their life.

There are ancillary factors, added EVPassport's Shahidi. "Midwest buyers, for example, have really cold winters and really hot summers. That has additional wear and tear on the battery of the car."

The general consensus for the lifetime of an EV battery is roughly 10-20 years depending on how it was charged and climatic conditions. A useful rule of thumb, provided by the vehicle data company Geotab, is that an electric vehicle battery will degrade by 2.3% every year.

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08-13-22 1028ET

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