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So then, if you've purchased a vehicle at or very near MSRP, you paid 30 percent more than you really could have. If you offered a trade, it's highly likely they took your car, gave you a purchase credit, then wrote the dollars back in on the contract.
Interested in not doing that again?
Follow me into the very ugly world of car buying. Roll up your sleeves, this won't be pretty!
It is often difficult to obtain the actual invoice price of a car. It is possible to guess at it, and in the course of your dealings figure out where you are in relation to it though.
Rule number one in any sales deal. If you can't walk, you are going to pay the highest price you can bear.
Rule number two: If you don't know something about their real cost, you have no way to know whether or not you are negoiating a good deal for yourself.
So, let's fix that!
Buying a car is a process. It takes some effort on your part, and it will take some of your time. The first time committment is your personal prep time that you invest before walking onto a lot.
- Pick your car out well in advance.
- Do the homework on it to determine as closely as possible what the dealer price is. There are various sites on the net that will help you with this for a fee. Compare a few and pay for some data. Average the numbers you get and that's somewhere near the price the dealer paid for the car.
a. There is the raw price to build the car.
b. Add to it some percentage of Manufacturer markup. You have no control over this, so just accept that it is there.
c. Add to this the dealer hold back percentage. 3-5 percent. http://www.edmunds.com/...
MSRP is typically 30 percent over invoice, if not more. These days, I'll bet they've shaved that down some, but I'll also bet they pack it into the back end contract.
e. Anything above this is the margin they get for selling the car.
As an example of what kind of money we are talking about, When I bought an Expedition a few years back, the MSRP was 42K. I ended up buying the vehicle for 31,500! The invoice for the car was somewhere just under 30K, for reference. I guessed at 28, and in the course of dealing, they showed me it was 30.
That's 25 percent, all of which would have went to the deal, in addition to the built in 3-5 percent typically included in the hold back as cited above. Had I not done an equally good job on the back end with contract, they would have nailed me for another 15 percent, for a total of 40 percent total markup on that car.
This is not small change. We are talking over 10-15 grand EASY on all but the very low end cars.
Be aware though, these tricks can turn a 9K go cart into a 16K go cart, and you will be paying interest on that meaning the cost of the car to you will double, rising over 20K without much effort on the part of the dealer and bank.
Doing this stuff is clearly worth your time.
- Now you establish your target purchase price. Some margin is reasonable. That's what they earn by doing the work to show, store and sell the car. Service is another profit center for them, unless it's a higher end car.
- Your homework isn't done yet.
If you owe on the car, do the subtraction to determine whether or not your trade actually has any value. It might not, or you might be negative. If you are negative, add this amount to the purchase price you established above for a new, higher purchase price.
Nobody will take a loss for you, and there are no "free" deals. Do the math, and know that will be your cost no matter how they position the numbers to make you think otherwise.
- Now you are ready to hit the lot. I still think the best deals are on the lot, done old school hard core sales style. Online deals are good though. I'm assuming you are going to actually get out there and buy your car the old fashioned way. The financial rewards and the sport of it are there for the taking!
- Compare your dealers. Ask around and get to know who is who and what they do. Info is your friend. Did they just hire a new sales guy? Have they recently redone their lot? Do they have a ton of the kind of car you want?
If they have lots of cars, you can deal. If they don't, you can't deal as hard. The new sales guy thing is great because you can hammer them and perhaps cut down on the time it takes to get the car, or have more fun, etc...
- Enter the lot, but DO NOT IDENTIFY THE CAR TO THEM YET.
- Show your trade. Get them to commit to a value for it, if you determined you have positive value in the trade as outlined above. They will want you to pick a car first, but don't do it. The value of your trade is the value no matter what car you pick, so make them do it.
If they don't, KEEP YOUR TRADE, unless you need to roll a loan over or something and then I can't help you because your ability to deal is comprimized when you do this.
Let's assume you've got some money down and continue. Don't tell them that yet either.
- Now the fun part! Go and pick your car!
An alternative is to test at another lot, telling them nothing but enough to get into the car. The purpose of two drives is so that you can actually know the car as compared to another car. Simple lemon filter.
- Now it's time to deal.
- You offer them a price that is the hard price of the car, minus one half the difference between that and your target purchase price. This makes your first offer unacceptable to them because they would take a loss.
Just doing this saves you about 10 percent, often more because MSRP is now totally off the table.
Now they will play silly games like, "if we meet your price, will you buy the car?". Keep pushing a bit below your target price, walking off a few times, get your free coffee, etc... until they offer something very near your target price and take it!
If they leave the desk, you do too. Take a nice long walk, and they will have to go and find you. This cuts down on the back and forth dealing between the lackey you are dealing with and the sales manager who is really controlling things.
Ideally, you can get them out there, if you push hard enough. No matter what you do, keep pressing until either they yield with your price, or you tire and leave. There is always the next day. Remember the rules.
So you reach a price and agree to buy the car.
- Now you talk through rebates, cash back, etc...
Be sure you get your trade in value subtracted from any promo price and your agreed upon price. Accept no special options or anything. That lets them confuse the deal. Once it's price, it's only price. If we go back to options, then we go back to negoiation again. Options missing lower the value of the car, meaning you have to go back re-establish your target price, then deal again.
At some point the deal is made, you shake hands and... It's time to do it again!! You've locked in price, but now have to haggle payment.
- Time to go do contracts.
If everything checks, you move to the contracts stage.
They will take the margin you dealt away, and pack it back into the contract for the car!!! For a real sucker, they just take their margin twice for one hell of a deal, and most people I know, don't know this. They are the ones that pay double for a car.
So, you look at the contract and focus in on the amount financed. Not the total cost of the financing, but the amount financed. If that amount of dollars is significantly more than the price you agreed to (and it will be), then you take out your pen, or borrow theirs and go cross out a bunch of numbers. Undercoating, advertizing fees, delivery fees, storage fees, prep fees, and other fees.
There will be some taxes and such, those are just part of doing business. No worries on those. Read that contract and ask really ugly questions about every item on it.
You don't pay advertizing fees. You don't pay lot fees. Unless they will actually deliver the car, you don't pay delivery fees. If it sounds like a bull-shit fee, it is. Cross it out.
Don't buy the sucker insurance either. You can always buy your own policy after the fact, or extend one you have. Theirs costs too much and won't really pay but for a very small set of cases. Skip it.
For things like undercoating, ask them if it's already on the car! If you are really evil, you ask this during the pick the car stage, so they commit to selling it to you. Otherwise, if it's on the car, and you've accepted a price offer from them, they are obligated to sell THAT car at THAT PRICE. Cross it off.
- When you get to your purchase price agreed upon, plus the tax, consider your interest rate.
After haggling over a few contracts you will see a good one, and sign that, pay your down, and now you've got a car at a fair price.
See? Wasn't so hard was it? (damn right it was – f¨ç˚ing brutal, but there you go! Have fun, get your sleep and be ready and eager to deal, or don't go until you are. This will take hours, but you save tens of thousands of dollars.)
One other thing. If they don't take your trade, they will offer to "take the car off your hands for a small consideration". Don't do it. Keep the car and tell them you will donate it for a nice tax write off. They hate that. Many trades go to their wholesale lot, where they mark them up more than double and sell them to suckers. You just dealt away the last of their bonus money and got a very solid deal.
Drive off, knowing that the vast majority of people pay way too much, and that they will be upside down in the car for the life of the loan, where if you have a nice amount down, you won't be.
I wrote this because the dealers are highly likely to be marking up cars to pad their margin with Cash for Clunkers money. Do it the way I outlined, and you won't be a victim of this.