Buying and Selling in the Used HDD Market

By Bob Martin, General Manager - May 2009 - Featured in Underground Construction Magazine

How do you describe the used HDD market today?

I would say that the used market is "finding" itself right now. I think a proper term might be "volatile". What we're seeing is a market where some models of drill are dropping completely off of the map in regards to demand, while others see a very high inquiry rate. There are some contractors that are losing their business, and others that cannot keep up with demand for theirs. Overseas clients are screaming for equipment, and yet find themselves restricted from buying by either their governments or by their banks. I suppose it falls under that old Chinese curse, "May you live in interesting times." Volatility such as this makes preparing for future conditions very problematic for a lot of contractors, and it will make it a challenging task to keep cash flows and equipment needs forecasted accurately.

I'd say that, in general, the used industry is healthy, but has its growth stunted by economic uncertainly and interference by overseas governments and financial institutions.

Is the current recession a factor in demand for used HDD equipment?

Of course it is. The problem is not so much that the recession has impacted the amount of work, but that contractors are finding it extremely difficult to get money. Not many companies could have forecasted the need for liquid assets in a world where lending would become virtually impossible. Those that either saw the writing on the wall or else operated their companies in that manner now find themselves in a huge buyer's market, with enormous opportunity to supplement equipment fleets and other resources.

How would you compare the market in the current recession to the one in 2000 and 2001?

There are obvious differences. I don't yet see things even remotely close to the dire times that the domestic US market saw in 2000 and 2001, where companies were going bankrupt by the dozen and used equipment prices plummeted to a mere fraction of pre-crash values. I can see current used HDD prices down by 10% versus pre-recession prices. The used equipment inventory is up approximately 15%. There are a lot of contractors who are being safe and liquidating unneeded or costly equipment to help keep cash flow high.

Obviously one of the biggest differences is that the recession isn't hitting just one country, but it is being felt to one degree or another all over the world. From our experience, the US is feeling it the worst, but the ripples have definitely spread over the entire globe.

Is the supply of good used drill rigs today plentiful? To small to meet demands?

As I mentioned previously, supply is actually up, and the machines that are getting listed are of low hours and recent manufacture. The high payments on these newer machines make them excellent fodder for liquidization by companies looking to reduce their payments and increase cash flow. For the most part, the gap in the used equipment market when there were very few new machines being made has been passed, and the demand now is for machines manufactured within the last four years.

In addition to machine age and hours of use, what are other key factors that affect the value of a used drill rig?

Obviously the contents of the package plays a big part. Some buyers will pay more for the convenience of purchasing a complete package versus having to source all of the components separately. Also, the availability of global dealership networks mean that some makes of drill are in much higher demand than others. There are units on the market now that are comparable to each other, but the drill with the support of an established dealership network vastly increases its value.

Recognizing condition depends on many factors, what do buyers look for in a "good" used machine?

Educated buyers realize that each machine is unique, and that there are typical things to look for that change depending on which machine you're evaluating. Having someone on-site who is familiar with the specific model of drill that is being considered is extremely important.

Hour meters, for the most part, can be ignored, especially on the older drills. Hour meters are too easy to swap out or roll back. There are telltale signs of age, again dependent upon the make and model that is being evaluated. That is why having an experienced company or individual guide you through the process is so important.

What are the most important things a buyer should consider in selecting a used HDD unit?

The first thing to consider is how good your dealer support network is. Will you be able to get parts quickly? Do they have qualified service technicians on staff that can repair the model of drill that you're looking at? Do they inventory the most common parts for your drill?

If the answer is yes to all of those questions, the next thing to think about is who is selling the unit. There are obviously more places to buy than just one. The major sources are end-users, dealerships, and brokerage firms. Each has its advantages and disadvantages, but the common string between all of them is the fact that you need to ensure whoever is selling the unit has a good reputation and knowledgeable staff willing to work you though the process.

What should sellers consider in preparing a used machine for sale?

You would be surprised how many contractors list their quarter million dollar drill packages through us with a one-sentence description and no photographs. If you're selling a drill, it needs to be "sold". That process involves getting a buyer excited about the product and comfortable enough with the description that they're willing to take the next step. Seller's should put themselves in a buyer's position, asking themselves what kind of information they'd want to know if they were looking to buy a drill. Service histories, maintenance records, and even a job history for the unit is all information that will help potential buyers feel more comfortable with the purchase.

Photos can also never be undervalued. Detailed photos show that there is nothing to hide and relay a lot about the condition and wear that a drill has seen. There is no such thing as too many pictures.

For goodness sakes, don't paint the drill! The first question we're asked when a repainted machine is being looked at is, "why did they repaint it?" Questionable vendors will repaint a drill to hide problems such as frame cracks and oil leaks. Unfortunately, a good paint job is expensive and time-consuming. Many seller's will take short cuts and simply spray the whole machine, covering up tracks, hoses, chains and anything else unlucky enough to get in the way. The resulting machine looks decent from a distance, but closer photos reveal what is being covered up and raises questions about how it looked beforehand.

If you really want to sell a machine, get it inspected by an independent third-party. We have a special designation on our website for equipment that has been properly inspected. We upload condition reports with the listings. Those machines are not necessarily perfect, but they are portrayed in an honest light, and buyers will know exactly what to expect in advance of the purchase.

In your experience, can a seller expect more by selling through your company that by trading the machine in on a new model?

Absolutely. Its simply economics. If a dealership takes a unit in on trade, they need to be able to sell it again at a profit. The price they buy it for is typically called, "wholesale". The price they sell it at is typically referred to as, "retail", which is usually the highest value that the market will currently bear, and the prices that end-users are paying for their equipment. Keep in mind that when you trade in a drill, a dealer can show you anything for a trade-in value, but the real number to consider is the difference between what you're trading and what you're buying. No other numbers are important.

By selling your machine on the retail market, you get the full market value for your equipment, and can purchase a new drill with cash, putting yourself in a much stronger bargaining position. Alternatively, by taking a middle road between wholesale and retail numbers, you get a quick turnaround due to its low price in a retail-pricing market.

We also deal on a global scale, which is something that no other avenue can offer. Our sales network consists of end-users, brokerage houses and dealers. We literally open the entire world up to purchasing the equipment, a vastly larger audience and far superior exposure than any other company can offer. Additionally, we have experienced sales personnel on staff, which really sets us apart from simple equipment listing websites. Our staff knows about drills, and everything that it takes to sell one to anyone, anywhere in the world.

Some in the industry believe that while there are refinements to new rig models, there have been few truly new features introduced on new drill rigs in the past five years. Does this perception make acquiring a good used model more attractive?

For the most part, yes. Older models typically have the advantage of cheap and easily accessible parts. They are also easy to work on which is very important for buyers in developing countries. The new drills typically have higher productivity, but at the cost of increased complexity, more expensive parts and increased downtime. The methods that people are using to punch holes in the ground has remained unchanged for decades, the rate that they're punching the holes is increasing.

There will always be call for the latest and greatest, but until an earth shattering (pardon the pun) development comes around and completely revolutionizes the industry, good used equipment will always find an audience.

This commentary is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. Neither HDD Broker, Inc nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.