How to avoid the trickery and get a good deal on a new car
I’m a disgruntled ex-car-sales guy. Which means I know all the gimmicks car-sales guys and dealerships use to increase their profits.
My intention here is to help people negotiate better car deals by having more tools available when they walk onto a dealership lot.
Here are the tricks of the trade that make it hard for consumers to negotiate the best price on a car; knowing how to counter them will give you the skills to win the game.
Car dealerships make their highest profit in five primary ways:
• by staying as close to the manufacturers’ suggested retail price (MSRP) as possible;
• by under-allowing on the trade-in;
• by jacking the rate (raising the loan or lease interest rate above what the banks or vehicle lenders are offering);
• by up-selling you into a more expensive car;
• and by selling you extra products when you enter the finance office to sign all the sales-contract documents.
I’ll go through each of these situations in detail as we go along.
Most buyers are aware that when a dealership sells a car at the sticker price, or MSRP, without any discounts, it will realize more profit. I’ll provide more information about the new-car profit margins available to dealerships a bit later.
The best way for mainline car dealerships to make their biggest profit is by hugely under-valuing your trade-in, usually by at least $3,000 below what Kelley Blue Book or Edmunds.com suggests your car is worth. It’s a salesperson’s job to convince you that your trade is worth less than you think.
Part of the process is for the salesman—we’ll assume he’s a man, though there are women selling new cars—to walk around your car with you and point out each imperfection. He’ll also argue about the value of all the maintenance and work you’ve done on the car to keep it in good shape by saying “Everyone does that” or “That’s good and we appreciate that.”
If you walk the dealer’s used-car lot and see a vehicle similar to yours in equipment and miles and question why that car is priced $5,000 more than the trade offer on your car, your objection will be brushed off by saying, “Oh, every car we take in trade has to be inspected and fixed so it’s ‘sale ready’; that costs us a lot.”
Car salesmen also understand that people are afraid to sell their cars personally through Craigslist or AutoTrader ads because they will have to negotiate with people who may be unsavory, who may make insulting offers on their cars, or who don’t have sufficient funds. I’ve also heard numerous people say they don’t want strangers to know where they live or work, so it’s worth it to lose some of the value on the car.
There are ways to deal with these drawbacks. Some basic rules are:
• Never meet someone at your home or work. Arrange a meeting in a public place and have someone with you.
• Require cash payment in full and never take a check.
• If your car is worth quite a bit and it requires that the buyer take out a loan, you can meet him or her with a loan officer at a bank or credit union so you’re sure the funds are available and there is an objective witness to the transaction.
I’ve found in selling my own cars, trucks and motorcycles that placing an ad in the AutoTrader online edition brings out more realistic shoppers. You avoid a lot of the creepiness factor that Craigslist ads seem to generate.
Back to negotiating a fair trade-in value at a dealership: The best way to do so is to be assertive and willing to walk away if you think the trade offer is too low. Automotive sales staffers are not going to have hurt feelings when you insist on being treated fairly.
You can learn the real value of your car by looking through Edmunds.com and pulling up its used-car appraisal tool. You key in the year, make and model of your car, then click on the options and miles on your car and describe its condition (be realistic). Edmunds.com will show you a market-smart real value, what it calls the “true market trade-in value.” You can also get this information by checking out Kelley Blue Book online or at the public library and looking at the prices cars similar to yours sold for on eBay.
It’s a good idea to print out the valuations and take them with you when you’re negotiating a deal that includes your trade. Dealerships want and need your trade-in, so negotiate trade value with vigor.
I once negotiated a trade value on an older Buick owned by a stubborn organic farmer who stated he’d leave if we didn’t give him $8,300 for his well-worn car. It was barely worth that in retail value, but he was willing to walk if he didn’t receive that value. The sales manager finally said OK. It wasn’t a winner for the dealership, but it meant we were able to sell another new car (a BMW coupe for his son). He went away happy and ready to recommend the dealership to his associates.
Dealerships also try to make more money by up-selling you—maneuvering you into a more expensive car than the one you first expressed interest in. If the mark-up on a new car from dealer invoice to MSRP is about 7.8 percent (as it is for BMWs), the greater the sale price, the greater the gross profit.
I worked a sale with a retired Navy combat pilot on a BMW M3 sports car. He refused to add any option beyond what he wanted, even if it meant he had to wait for delivery of the car. He also insisted on a very low mark-up on the car. Accepting the deal would mean the dealership would make only a $500 profit on a $61,000 car. I admired his character and stubbornness and, despite my manager’s wailing and telling me to kick him out, we made the deal.
Even as your salesman is trying to up-sell you into a more expensive vehicle, you may be able to negotiate significant discounts if you come prepared.
Many manufacturers publish their discount offers on their websites, and similar information is available through online consumer groups. In the case of BMWs, for example, the website BMW USA.com publishes the company’s rebates and discount finance or lease offers on the “Financial Services” drop-down menu.
Another good BMW go-to site is Bimmerfest.com/forums. This is an excellent place to ask questions about the value of a car and also to contact BMW dealerships that are willing to sell or lease you a new BMW at prices averaging $500 over dealer cost. In the “Ask-a-Dealer” part of the Bimmerfest forum you can see all the consumer-friendly programs BMW offers.
Unethical dealerships will not disclose the discounts available from the manufacturer up front, so a few minutes on Google can save you big money.
Also, lending and insurance companies such as USAA will frequently offer large discounts or rebates on specific new cars. One example is the recent $4,000 rebate and a sale price of $250 over dealer-invoice cost on 2012 Mercedes Benz E350s. A local judge used this program to realize great savings on his dream car. He also refused to be up-sold: He knew exactly what he wanted and was willing to go to Sacramento or the Bay Area if the dealership didn’t meet his needs.
He’s an extremely competent judge as well as a smart businessman. Before becoming a Superior Court judge, he accepted referrals from me when I worked as a public guardian, and he provided pro-bono, no-cost legal services to people who couldn’t afford respectful legal assistance.
When he first contacted the dealership he got the classic “Buy a car off the lot and we’ll give you a great deal” shuffle, but he refused to consider anything other than what he desired and almost refused to deal with the local dealership at all because the sales staffers simply wouldn’t listen to him—until he was brought to me.
With USAA’s substantial discount agreements negotiated with manufacturers, combined with excellent interest rates, he was able to forge an agreement with the dealership on an expensive car at a very reasonable price.
Good discounts are also available through the Costco auto-buying service. Costco has very specific agreements with dealers whereby they agree to sell a car to a customer at a minimal amount over dealer’s invoice. It’s a free service if you’re a Costco member.
Also, check with local credit unions to see if they have special programs on specific cars to make their purchase price and finance costs more affordable. This legwork can save a buyer thousands on the price and also in lease or purchase finance costs.
You can go to Edmunds.com and use its tools to build the perfect car for yourself and then see what the dealer-invoice cost is on the car with the options you want. Or you can play around with the manufacturer’s websites and see what the perfect car would be and then jam over to Edmunds.com and see what the invoice on the car is.
Car-loan interest rates are credit-score driven, with better credit getting the best rates, but even customers with somewhat rocky credit can be approved for loans, though at higher interest rates. Extremely high-rate loans are more typical of low-rent used-car lots that are working deals for less well-off customers who have compromised or no credit history.
In cases like these it’s frequently a good idea to join a credit union and work with a loan officer, who will help you find a loan that works for you at lower cost.
After you’ve agreed on the purchase price of a vehicle, you’ll enter the dealer’s finance office, where you’ll be charmed, alarmed, nagged and coaxed into buying products in addition to the car. Warranties and after-sale products are huge money-makers for a dealership, but they often don’t make sense for a consumer. Why spend $750 for paint and interior sealant that a good detail shop will provide for less than $250? Why purchase wheel and tire coverage that many auto insurance companies offer at no cost?
Dealerships also will sell your loan to an auto loan finance company, which allows them to raise the interest rate on many loans by 1 percent or 2 percent. Bumping the loan rate by 2 percent on a $50,000 car can generate a couple grand in extra profit upfront for the dealer but add $60-plus per month to payments.
Dealers will also bump the lease-money factor (LMF) on leases. If a dealership marks the lease-money factor up by 40 “points” on a 36-month BMW lease, for example, it will realize about $2,200 in extra profit.
Customers should insist on the “buy rate” in purchases and leases and not allow unscrupulous dealerships to jack up the rates—or make money on the back end, as they say in the business. It’s all scam stuff, and something a smart consumer can avoid with diligent research and assertive stubbornness.
That’s what happened with a couple of business partners I’ll call Kelli and Jerry. They knew exactly what they wanted and could afford, and they had talked to friends who knew all about the sales process. They educated themselves on what the real LMF figures were and refused to allow the lease rates to be bumped up. They were also were resilient and funny as we worked through intricate leases on three new cars for their company.
They didn’t get angry when the sales manager tried to manipulate the deal to favor the dealership and when he refused to sell a car at the price they wanted. They could have gotten angry and left, but they stayed cool and worked it like a complicated business negotiation, which it was.
Part of the reason this deal worked was that the salesperson was absolutely specific about what was going on: What the costs of the leases were, what the dealership could do in addition to working on price (mats, mugs, a neat little BMW cooler). So Kelli and Jerry got good deals on three great cars and also helped the dealership reach a monthly sales goal that meant it could order more cars in the next ordering cycle.
Here’s something most customers don’t know: Car dealers make more money by selling used inventory than new. That’s because the cars were bought cheap, and there’s a large difference between trade-in value and retail value. If dealerships get a great deal on a trade or auction car, they can price it at what they call “market value” and show their price is slightly below what Kelley states is a correct retail value.
Even high-end dealerships practice old-school sales practices: Behind the ties and smiles the intent is to squeeze money out of the customer by pretending friendship as well as listening to and dismissing fears about the cost of vehicles by “overcoming the objection.”
Another scam dealership managers and owners practice is to over-promise their own prospective sales staffers during hiring. Managers will state, “You can expect to make $80,000-plus a year selling cars here: James made more than that last year.” The reality is that most car salesmen struggle to make $2,500 a month and work 60-plus hours a week. It’s a gruesome business.
In a dealership salesmen are at the bottom of the pile in terms of respect because there’s always another poor schlub who wants to sell cool cars and hasn’t learned what a dicey business he’s getting into.
There’s a mind-set in car sales that’s probably necessary for survival as a salesperson—that it’snot lying to tell customers that their trade-in cars are worth thousands less than what they expected, and that withholding information from customers is fine. After all, the customers should have used due diligence to know everything about the value of their trade and also know what the cost of repairs should be to get the car lot ready.
Car-sales people also have a slogan: “Buyers are liars.” They convince themselves that every person who walks on the lot will lie to them. The smug repetition of that phrase by salespeople to justify their own ethical impairments is the single biggest reason I left the profession. I thought it was creepy, disrespectful and untrue.
On the flip side, most salespeople are not resistant to people who have used resources such as Kelley Blue Book, Consumer Reports or Edmunds.com to see the true market value of their trade. It cuts down on the back-and-forth and speeds the negotiation.
If a salesperson can tell the sales manager, “This is the least they’ll take for the trade,” it alerts the manager both that you are serious about a purchase and also have done research. It also helps you move toward taking some of the emotion out of the negotiation by making the terms more concrete.
If you’re working with a salesperson who creeps you out, it’s totally appropriate to tell a sales manager that you wish to work with someone else. This happens more than you think, and it won’t be a surprise to either the salesperson or the manager.
Car dealerships are archaic institutions that still rely on gimmicks and pressure to make profits. The sales manager is constantly telling sales staff to “Get them excited about the car” and “Take control of the process,” under the assumption that the customer can be pushed from excitement to purchase using old-school verbal tricks like “I want to earn your business” and “What will it take for me to sell you a car today?”
If your spouse or partner is not available to agree to the sale, the salesperson will frequently offer to allow you to take the car home for the evening so you take emotional ownership of the vehicle by driving it yourself. The salesperson will also say, “We can only offer this price today,” or “The car could be sold while you’re thinking about it.” The reality is that if you’ve worked out a fair price the dealership isn’t going to walk away from it even if you come in a week later.
Other cute old-school tricks are gimmicks like having “midnight madness” sales and promising much lower prices for people who come in during the sales. Frequently the midnight madness cars are priced exactly the same as they were before the “sale.” By tracking the price of used dealer stock on the dealer’s website and comparing, you can expose the fraud.
Another eccentricity of car sales is that the processes haven’t changed for many years: The manipulative behavior and language are the same as always. Sales managers typically have received very little management training. They’re usually salespeople who have been successful and are offered management positions so they can train others in their trickery skills. They don’t know how to mediate with owners on behalf of their staffs, and they repeat the same cliches to their staffs that they were given when they began their car-sales careers. Peter Principle incompetence abounds.
It’s always helpful to hit the feedback sites like DealerRater.com and read what other consumers who have dealt with a dealership previously have to say about it. You can get a sharp picture of dealer practices that way.
I strongly recommend negotiating a new-car deal by working with the dealership’s Internet sales department: You can negotiate via email and set a price and then come in to pick up a car and do paperwork with less emotional drama, greater efficiency and less negotiation.
As a final note, there are some noble and honest car-sales people out there. Here are a few I’ve worked with and respect: Sales Manager Sean Ford and Sales Consultant Steve Wright at Mercedes Benz of Monterey; Terrie Ross, Armando Cortes, Bob Thomas and Pete Opel, sales consultants at BMW of Monterey; Bill Smith, the Internet sales adviser at Courtesy Motors in Chico; and Alan Ramos on the Courtesy GMC sales side. I’d buy a vehicle from any of these professionals, and the negotiations would be clean, honest and enjoyable.
By: Walter Irish/Chico News and Review
About the author:
Walter Irish is a recently retired high-end auto-sales adviser in Santa Fe, N.M., and Monterey, Calif. He worked previously for Butte County as a mental-health clinician, a Superior Court investigator, a Children’s Protective Services investigator and a public guardian/conservator. He’s currently a race-track instructor for Hooked on Driving and is writing a novel. He lives in Chico.