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How To Buy Automobiles
By Russell Hobgood
Everything You Ever Wanted To Know About How To Buy
An Automobile Without Getting Taken To The Cleaners
Having been in the automobile industry for over 25 years I tend to assume that “everybody knows that”. My wife has picked up on lots of the tips and strategies over the past couple of decades since we have been married now for over 28 years. But then there are those times when I’ll be at home speaking car sales vernacular and she’ll still not follow what I’m saying, even after all these years together. So with that being said I thought I’d offer up some suggestions to help you buy that next vehicle without going in blind. I’ll try to be brief and concise. First piece of advice is simple. Do your homework. It’s easier than ever before with the aid of the internet to research the dealer’s cost of a new vehicle. Some of the manufacturer’s own websites even give you the invoice (cost) price and allow you to “build your own” XYZ Model. Now that you are armed with the cost of the car/truck/SUV you want to buy proceed to the dealership. And in fact you can even do your shopping over the internet via most dealers’ websites. Occasionally you can even buy the vehicle you want for less than the dealer’s invoice. An example is Ford Motor Company currently letting the public buy a new vehicle (with a few model exceptions) for the factory employee’s cost, also known as A-Plan. On most of their lineup that will save you a few hundred extra bucks. Oh, and you also get to take all applicable rebates in addition to the employee pricing. Normally however the dealer is going to want to make a variable amount of profit (markup) over his invoice amount. So the fact that now that you are armed with the actual cost that he pays will help you keep him honest. And it’s okay to let him know that, too. (probably save you a ton of haggling or negotiations ) Supply and demand definitely enter into the equation, example: the popularity of Hybrids when gas prices go up. You may see them marked up way over the MSRP (Manufacturer’s Suggested Retail Price) In those cases there will be an additional window sticker or “addendum label” on the vehicle announcing ADP (Additional Dealer Profit) or ADM (Additional Dealer Markup) for X amount of dollars. Be wary of intangible accessories like Paint Sealant or Undercoating, etc as most manufacturers are already taking care of that and it’s just another profit opportunity for the dealer. I think “hard adds” like a bedliner in a pickup truck are justifiable, but bear in mind that the dealer is marking those items up also. So you may want to shop around for your accessories, too.
Another factor to consider in how much profit you will allow the dealer to make over his “cost” is Dealer Holdback. This is money that the factory gives the dealer when he sells a vehicle, partly to help offset his expense in floor-plan costs, etc. In MOST cases it is used as additional profit per deal and if pushed enough to sell a unit it is common for a dealer to go below invoice price and “get into the holdback money”. For purposes of this discussion let’s use 3 percent of cost as a good average to calculate holdback. So if a vehicle has a dealer cost or invoice of $24,602.90 the holdback amount is probably at least $738, possibly a little more. In other words even if a dealer sells you this vehicle “for invoice” he’d still be making $738, plus whatever profit from the addendum label. For used or “pre-owned” vehicles it’s not quite as easy to know what the dealer’s cost is, like it is when shopping for a new one. But I can offer you some suggestions here, too.
On a used auto when the dealer is buying one wholesale or trading for it, he has to make an educated guess as to what the retail market price will be (what he can sell it for) and then work backwards from there. The dealer has to take into consideration “what the book is” (one of the market guides used by lenders to determine how much to loan on the unit). Some banks use the NADA guide, others use the Black Book, and still others use the KBB. (commonly called the “blue book” by many buyers, the NADA cover is actually Yellow in color; Kelley Blue Book is blue) If you have a trade-in and access to a computer and the internet I highly recommend checking out www.KBB.com for an idea of what the market value is on your trade. And that’s also a big piece of the puzzle in helping you guess at what cost the dealer took in the former trade-in that you are now interested in purchasing.
As I said earlier, on a used car the dealer has to work backwards mentally during an appraisal. He has to calculate the dollar amount of reconditioning the vehicle will need to spruce it up cosmetically and/or make it mechanically sound. Let me give you an example. Let’s say you have found the exact 2005 Toyota Corolla you’ve been wanting. It has 48,000 miles and the dealer is “asking” $10,990. The dealer deserves to make a profit what with his overhead and liabilities. And if I had to pick a median figure I would say the average used car profit is $1500-2000 after all is said and done. So let’s examine the 2005 Corolla. The dealer was “asking” $10,990 but now after doing your homework you noticed he has run it in the newspaper “on sale” for $9,990. Reality is that he probably has still left himself some “wiggle room” at $9,990. Assuming that amount is $1,000 the actual amount he may be satisfied with would then be $8,990. Using my average of $1500-2000 profit as a rule of thumb, subtract $2,000 from $8,990 and that leaves you $6,990. Remember I said he had to work backwards? Take $6990 and subtract the cost of his reconditioning, maybe a set of tires, etc. and you’ll get down to approximately $6,740. (most dealers will gladly show you their reconditioning expense on the vehicle in question) Checking my suggestion of surfing the KBB.com website I find that the average trade-in on a 2005 Toyota Corolla CE with 48,000 miles, automatic transmission, and in fair condition, is $6,750. Pretty close , huh ? And quite a long ways from the “asking” price of $10,990 !!! One additional note here, it is crucial to not over classify your trade-in when trying to use an online guide for determining it’s value. Read the explanations closely on what separates the “Excellent” condition from the “Good” and from the “Fair” condition. Accurately consider the appropriate amount of reconditioning your car will need to make it “front line ready”. Does it need tires? Is the windshield cracked? Is the headliner hanging down? What about dents or dings or paint condition? Mechanically sound? And also remember that the accessories you like ($1000 stereo’s , $2000 custom wheels, etc) may not help the resale value in the minds of the next purchaser. Oh yeah. I almost forgot, I promised to keep this brief, didn’t I ?
Summing it all up, do your homework. Be prepared. If at all possible arrange your own financing ahead of time. (that’s a whole different can of worms to examine) Take your cost of the vehicle you want with you to the dealership. Test drive the car to be sure it is in fact what you thought it would be. (and equipped like you wanted)Negotiate the best price you can with the dealer. THEN admit to having a trade-in and then let them appraise it. Remember you have already done that homework, too. This will eliminate the dealer from being able to play games with you on your trade-in’s value, showing you a “trade-in allowance” from their inflated selling price. By waiting until after you have agreed to a purchase price on the new one now they will be forced to show you what they are really evaluating your trade-in for. Hopefully this helps some of you to make an informed purchase. In a different article I’ll discuss some of the ins and outs of dealer financing, extended warranties, GAP protection, Credit-Life Insurance, and more.
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Contributor's Note
This is a Noobie's guide to car buying basics written by my husband.
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This intel first appeared on: http://www.freemoneyhomebusiness.com
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