Carvana Sought to Disrupt Auto Sales. It Delivered Undriveable Cars.
Terri Burton wanted to do something special to mark her son’s high school graduation, so she bought him the car of his youthful dreams: a Volkswagen Golf GTI.
But the purchase was the start of a nightmare. Within months of getting the car, her son, who has autism, was stopped twice by police in their South Texas town because Carvana CVNA +10.06% (ticker: CVNA), the company that sold the car to Burton, hadn’t registered the vehicle in her name, she says.
It wasn’t until almost six months later that Burton learned the reason for the registration delay: Carvana couldn’t transfer the car’s ownership to her because the company—officially, at least—hadn’t owned the car.
Mark Ralston / AFP via Getty Images
Problems with the paperwork from Carvana’s earlier purchase of the car for resale were keeping it from getting official ownership, or title, to the vehicle, a Carvana customer-service agent explained in a tense phone call late last year that Burton, of Corpus Christi, recorded.
“It was horrible,” says Burton, whose son had panicked each time he was pulled over by officers suspicious of the temporary out-of-state license plates that Carvana had been issuing for the 2017 hatchback in lieu of providing permanent Texas ones. “This was my gift to my son, and they messed it up so bad.”
The Burtons were among thousands of families that purchased cars from Tempe, Ariz.–based Carvana during the pandemic, when the company thrived by taking on traditional dealers with a web-enabled, highly scalable approach to vehicle sales. Carvana’s used cars often arrive at customers’ homes with the same convenience as Amazon-delivered paper towels. Customers can also pick up cars from Carvana’s multistory glass towers, which are designed to dispatch vehicles like cans of soda from a vending machine and include ceremonial coin slots.
But as the economy has reopened, Carvana’s efforts to resume its torrid pandemic-era sales pace have been complicated by an inconvenient side effect of the growth: In its haste to seize market share from competitors, Carvana was selling cars faster than it could get them registered to their new owners.
Disgruntled Carvana customers have long shared their gripes about registration delays and other issues—including late deliveries, undisclosed vehicle damage, and missing accessories—on online message groups and to the media.
Barron’s interviews with Carvana customers and former employees shed light on why registrations were delayed and how state regulators have tried to address the issue. The reporting reveals a company scrambling to address the problem, at one point forming an ad hoc unit known as the “undriveable-car task force.”
Carvana says many of the delays involved internal paperwork problems, including errors on title documents, missing documents from buyers, and slow work by third-party registration services and state motor vehicle agencies.
In other instances, though, including Burton’s, Carvana sold cars before it had title to the vehicles, an action that is illegal in many states where the company does business.
Carvana said in a response to questions for this article that very few of its customers experienced registration delays, and that only a small number of these delays were the result of the company selling cars before it had title.
The company says its record should be viewed in light of the many purchases and sales it makes, and the challenges of operating during the pandemic. Carvana sold more than 425,000 cars to retail customers in 2021, up 74% from a year earlier.
“Carvana, like many dealers over the past two years, has in limited instances encountered challenges processing title and registration paperwork for its customers after the sale,” the company says. “In a very small percentage of a very small percentage of instances, customers did not receive permanent license plates or transferred title within the time frame set forth by the respective states.”
Interviews with state officials and former Carvana employees show the issue is wider-reaching than the company suggests.
Burton and other customers, meanwhile, are lining up to challenge Carvana in a lawsuit filed in U.S. District Court in Pennsylvania that alleges some of the company’s customers went years without being able to legally drive vehicles they paid for. The suit, for which class-action status is being sought, identifies about two dozen potential plaintiffs.
And state regulators across the U.S. have been subjecting the company to suspensions or increased oversight over registration delays and its practice of issuing multiple temporary license plates from states where it has dealer’s licenses, instead of promptly providing permanent ones.
Carvana insists the lawsuit has “no substantive merit.” Its attorneys have sought the suit’s dismissal, arguing the claims should be handled through arbitration under plaintiffs’ original sales contracts with the company. A judge in Easton, Pa., is deliberating on whether to let the case proceed.
Carvana says the regulatory issues focus on a relatively small number of sales from 2020 and 2021. “We’ve had productive conversations with regulators in all of those states and feel very confident about our operations going forward,” it says.
The scrutiny comes at a difficult time for Carvana, which has seen flagging sales, steep losses, and a stock that’s down more than 90% from an August 2021 peak.
Carvana CEO Ernie Garcia III has vowed to slash some $125 million in spending, including laying off around 2,500 employees, or about 12% of the company’s staff, in May. At the same time, Carvana is rushing to turn its recent acquisition of Adesa U.S., the country’s second-biggest car-auction business, into a new leg of growth.
The $2.2 billion purchase, financed with high-interest debt, gives Carvana a national network of parking lots and garages that it says will be used to recondition hundreds of thousands more vehicles each year for resale.
Carvana was founded in 2012 as an online-focused subsidiary of DriveTime, a used-car business owned by Garcia’s father, Ernie Garcia II.
The elder Garcia grew DriveTime out of an earlier used-car company, Ugly Ducking, which he purchased in 1991, the year after he pleaded guilty to a felony bank-fraud charge related to the implosion of Charles Keating’s Lincoln Savings & Loan Association.
Prosecutors accused Garcia II of posing as a borrower on a fraudulent mortgage from Lincoln that generated bogus profits for the bank in return for getting a loan for his own real estate business. He was sentenced to three years’ probation. Garcia and his real estate business later filed for bankruptcy.
Garcia III, the son, spun Carvana off into its own business with himself at the helm in 2014. He and his father remain the company’s largest individual shareholders. The younger Garcia soon began erecting the company’s trademark “vending machine” towers in cities throughout the country.
Carvana went public on the New York Stock Exchange in 2017. The initial public offering valued the company at roughly $2 billion.
From its earliest days, Carvana emulated West Coast tech companies that aimed to disrupt established industries with new, online business models.
CEO Garcia openly compared the company’s approach with that of Amazon.com AMZN +3.58% (AMZN), and its motto for employees—“Your next customer may be your mom”—echoes the e-commerce giant’s customer-centric business ethos.
There were also quirky, Silicon Valley–style workplace perks. For their one-year work anniversaries, some employees were given Allbirds BIRD +1.35% —the woven wool sneakers favored by West Coast tech entrepreneurs—marked with the car dealer’s logo, a halo hovering over a sedan.
Meanwhile, Carvana’s custom-built headquarters in a Tempe business park includes a room known as “the library” with leather chairs, a wood-paneled ceiling, and book-lined shelves that slide away to reveal a cocktail bar in a secret nook. It was largely stocked with bottles from Costco’s in-house Kirkland brand, one employee says.
But Carvana’s biggest similarity with the tech start-ups may be its willingness to burn through cash in a race to displace old-line incumbents and outpace potential competitors. In its quarterly earnings reports, Carvana repeatedly posted net losses, even as Garcia assured investors that the company was forging ahead on a path toward profitability.
“We wanted to build a paradigm-shifting company,” he told analysts in May 2018, about a year after the company’s initial listing.
A couple of years later, as the coronavirus pandemic began rewiring the economy, Garcia was delivering on that promise. Car buyers across the country found themselves flush with stimulus cash they could put toward down payments on vehicles. Carvana’s online model was a perfect fit for quarantines and concerns about in-person contact.
During the three months ended June 30, 2021, as the country muddled through a second spring in the pandemic’s grasp, Carvana posted its first, and only, net quarterly profit. By that August, Carvana’s stock traded at $377, giving the company a market value of more than $60 billion, larger than older publicly traded peers CarMax KMX +7.19% (KMX) and AutoNation AN +4.15% (AN) combined.
In January of this year, Carvana announced the sale of its one-millionth car, casting the event as a key milestone in its quest to become the country’s largest auto retailer. CarMax, the current No. 1 auto dealer, sold more than 924,000 cars to retail customers in its latest fiscal year.
“Carvana’s mission is to change the way people buy and sell used cars by creating a transparent, simple, and enjoyable customer experience,” the company said at the time. “The auto industry is fragmented—and that means there’s ample room to grow.”
Shortly after Carvana opened its 28th vending machine tower in early 2021 near the Las Vegas Strip—there now are 33—JD Decker, the Nevada Department of Motor Vehicles’ chief lawman, was patrolling the desert metropolis when he stopped a car for driving with an expired temporary license plate from North Carolina.
The driver told Decker he’d been getting one temporary license plate after another from Carvana, and was waiting for the next one. He showed Decker a stack of expired temporary plates from around the country he’d burned through.
“He probably had about 10 different states represented,” Decker says. “He had the car for about a year and there was a problem with the title, so they just kept sending him temp tags from all over.”
Former Carvana employees say this was standard procedure by then: The company had started encountering delays in getting vehicles registered to its buyers, so it would use its dealer licenses across the country to issue temporary plates from multiple states to customers.
“You might end up with a Tennessee temporary plate for 45 days, then an Ohio temporary plate for another 30 to 45 days,” says a former senior member of the department at Carvana’s Tempe headquarters that responds to the most serious customer complaints, known as the executive resolution team.
“Customers would end up getting sometimes four to six different temporary plates from multiple states,” says the former staffer, who was laid off by the company after almost two years in April following a dispute over workplace accommodations for a disability. He asked not to be identified, citing ongoing litigation with the company over his dismissal.
Some of the sanctions levied by states in recent months cite the improper furnishing of temporary out-of-state plates. Carvana says it has “had a number of productive and helpful conversations with regulators across the country” on the topic of out-of-state plates and is “very confident in our processes going forward.”
By early 2021, Carvana was staffing up to deal with title issues. That’s when Thomas Hollingsworth joined what he was told was a newly formed titles department at the Tempe headquarters tasked with solving issues that were keeping cars from getting registered to their new owners.
Until he left the department for another role at Carvana that August, Hollingsworth—who has also since left the company—spent his days on the phone with banks, state motor vehicle departments, and former owners working to fix paperwork snags.
“I would come in at 7 a.m. and I would leave around 2:30 p.m., and the whole day was basically running through these titles,” he says.
During a period of heavy hiring that fall, Carvana established a new category of staffers called “paperwork specialists” to better manage the documents that flowed in and out of the company with the cars it bought and sold, says a former member of the auto dealer’s recruiting team.
The paperwork specialists were entry-level workers making $15 an hour who were sent out in the field after two weeks of rudimentary instruction, says the former recruiter, whose job was among those lost in the May layoffs and who asked not to be identified for fear of reprisal.
Carvana says it strongly disagrees with the recruiter’s characterizations on pay and training. “As a growing business with a novel model, we constantly create new roles and adjust existing ones,” the company says. “We’ve been fortunate to hire a number of great people in all roles.”
But Carvana’s sense of urgency surrounding the title-transfer issues may be most apparent in its formation of the undriveable-car task force in May.
Samantha Berger, another former member of the executive resolution team, says three of her colleagues were pulled aside for specialized vehicle-registration training early that month and given a “giant spreadsheet” of cars.
The cars were ones that Carvana had been keeping on the road with temporary plates that were now expiring, leaving them to languish, undriveable and parked outside new owners’ homes, says Berger, who wound up leaving the company days later, shortly before the layoffs.
Asked about the undriveable-car task force, Carvana says that its “internal teams have done an incredible job solving unprecedented business process challenges associated with a global pandemic in real-time.”
From his perch in Carvana’s titles department, Hollingsworth says he was able to see where the company’s process went wrong: Sometimes cars got sold off its lots around the country before document handlers in Tempe had time to finish getting the cars’ titles transferred to Carvana.
No states are known to have sanctioned Carvana over the practice of selling vehicles without holding title, but in multiple states where Carvana does business—including Texas, Pennsylvania, Michigan, and Illinois—regulators say it’s illegal in most cases to do so.
While some traditional used-car dealers concede it isn’t unheard of to sell vehicles before holding title, most do so only sparingly, and only if they’re sure they’ll obtain title quickly enough not to cause registration delays for their buyers, according to Jonathan Chariff, CEO of the South Motors auto group in Miami. Florida requires dealers to possess a vehicle’s title, or some other evidence of ownership, before making a sale, a state motor vehicle department spokesman says.
Carvana says that “for a limited time period, Carvana offered a small percentage of cars for sale prior to receiving the paper certificate of title,” but that “when viewed in totality, the cars for which the paper certificate of title hadn’t arrived at time of sale were a very small percentage of Carvana’s sales.”
Furthermore, Carvana says it only sold cars without a title “in the states where such practice is permissible.” However, customers in states where it is illegal tell Barron’s that they learned from Carvana that it sold them cars without holding the titles.
Those customers include Burton, the Texas woman who bought the Volkswagen hatchback for her son.
Another Carvana customer, Melody Postoy of Glendale, Ariz., another state where the practice is barred, traded in her Lexus for a later model in late December. About 2½ months later, the last of the temporary plates Carvana provided her expired, leaving her unable to drive the car, she says.
She spent hours on the phone with customer-service agents who offered constantly shifting excuses for why Carvana had been unable to get her registered as the vehicle’s owner.
One agent attributed the problem to difficulties with title transfers across state lines. Postoy says this surprised her, since a vehicle history report she reviewed showed that the car had always been registered in Arizona.
In April, when Carvana agreed to reclaim the vehicle for a refund, the agent Postoy spoke with to arrange pickup offered a different excuse. “They told me they were having issues getting ahold of the title,” Postoy says.
When asked about such anecdotes in states where vehicles may not be sold without holding title, Carvana said it didn’t want to discuss specifics of its legal analysis.
Even in states where selling vehicles without title isn’t prohibited, registration delays have caused problems for Carvana’s customers.
One potential plaintiff in the proposed class-action suit, a hospital lab assistant in North Carolina named William Stalls, bought a 2012 Hyundai Sonata from Carvana in January 2021. Over the next 12 months, Stalls was issued temporary plates from Georgia, Tennessee, Arkansas, and Arizona, the lawsuit alleges.
While driving with one of those plates, police pulled him over for speeding and found in a database that the car was still registered to a prior owner, according to the complaint.
“Despite Stalls showing the officer his sale paperwork and explaining he was waiting for permanent tags from Carvana, Stalls was arrested and confined to jail for eight hours before posting bond,” according to the suit.
An attempt to reach Stalls was unsuccessful. Attorney Robert Cocco, who filed the lawsuit, declined to comment on the case. Asked about the Stalls case, Carvana reiterated that the lawsuit had no merit.
In February, a month after celebrating the sale of its first one million cars, Carvana disappointed investors with an earnings report that showed sales flattening in the fourth quarter of 2021 after their pandemic-era boom.
“It is an understatement to say a lot has changed about our environment,” Garcia said three months later in his employee letter announcing layoffs.
Inflation was squeezing consumer savings, car prices had soared, and the company was dealing with mounting debt as a result of its Adesa acquisition.
Carvana was also facing scrutiny from state motor vehicle agencies over the company’s failure to meet vehicle registration deadlines and the use of out-of-state permits by its customers.
Early this year, Pennsylvania officials suspended the company’s license to issue temporary permits at its two vending-machine towers in that state, in Philadelphia and near Pittsburgh, citing late document submittals, “improper issuance and verification of temporary Pennsylvania plates in other states,” and other violations, Pennsylvania Department of Transportation spokesman Diego Sandino said in an email.
The suspension at the Philadelphia location is active until August, Sandino says. The location near Pittsburgh is suspended for three months after it comes into compliance, which as of late May it hadn’t yet done.
The Pennsylvania actions came in response to “temporary technical operational challenges that have since been corrected,” Carvana says. “This does not impact our ability to sell cars in Pennsylvania.” The company is still able to issue temporary license plates in the state through a third-party licenser, it says.
Issues related to late title transfers and the use of out-of-state plates have also resulted in increased oversight in Illinois, where the company was forced to cease business entirely for about two weeks in May. A suspension in a North Carolina county ended in January, though the company remains on probation in another North Carolina county. Carvana’s license is also on probation in Michigan over registration issues.
“Carvana is confident in and proud of our current title and registration operations,” the company says. “We have productive conversations with regulators in every state where we operate and are very confident that our current operations are designed to meet state standards.”
Even Carvana’s home state of Arizona has clamped down on the company’s operations after officials there received more than 80 complaints about the company over a four-year period, says Arizona Department of Transportation, or ADOT, spokesman Bill Lamoreaux.
The complaints revolved around “such issues as missing, delayed, and altered title and registration documents, contract discrepancies, significant odometer discrepancies, and incomplete emissions at the time of sale,” Lamoreaux says.
Carvana often used temporary license plates from Arizona, according to customers and former employees. The state allowed car dealers to issue temporary plates even for sales that occurred in other states, according to Lamoreaux. Last month, Arizona canceled that program after discussions with Carvana, he says.
Lamoreaux declined to provide further details, citing open investigations into Carvana’s registration practices.
“ADOT tries to accommodate businesses like Carvana with their unique online business model as best we can,” Lamoreaux says. “But for consumer protection, we need to make sure that all car dealers operating in Arizona are following state laws.”