MSRP is a Fair Price for That New Car
If you think about it, the anxiety associated with buying a vehicle is directly caused by the fear of negotiations. Over the last few years I’ve often wondered why more manufacturers don’t simply go to a one-price marketing system. Many dealers must recognize a problem because I see a grassroots effort happening all over the country in one-price shopping.
1) Make a conscious decision to buy within a certain time frame.
2) Research vehicles you intend to consider on the manufacturer’s website. Your research should include dealer invoice, warranty, fuel efficiency, standard features, options, finance or lease plans and at least two dealers near you. If you are purchasing a pre-owned vehicle try to purchase one that is certified. Do some online comparison pricing on similar vehicles with similar miles. When you get to the dealer ask for a Carfax report. Not that Carfax knows all, but it might have valuable information. Look for fluid leaks beneath the vehicle. If you intend to buy, and it’s not a certified car then you may want to take it to an independent mechanic.
During your research you will likely come across articles that are titled something like this, “what is the dealer hiding” or “tricks that dealers will play on you” or “what to be leery of when buying a car” or blah, blah, blah. Believe me, there are no clandestine conspiracies among dealers to do anything other than serve the public. Dealers have nothing to hide. As a matter of fact if you do your research, the dealer will be negotiating from a disadvantage. The information highway has brought all of the information right to your fingertips and every dealer is just a mouse click away. Now, that’s not to say there aren’t some run and gun, shoot from the hip, horse trading, high pressure crasfty rascals still out there. Just go with your gut feeling, you’ll know within minutes if you need to put your boots on. I had a guy in chest waders once. He told me he’s already had on his puddle slippers, knee boots and hip boots. So I asked him…”is this your last pair of boots?” I knew I had him.
Be mindful that dealers, just like all business owners need to make money, so don’t get your kicks by wringing the last few dollars out of a deal. Take pride in the fact that a deal is fair for everyone. After all, the dealer did invest millions to sell and service automobiles. You will want them around when it is time for service.
Ok, things you may not be aware of; dealers spend an average of $350.00 – $700.00 per car sold in advertising. It costs them almost $200.00 to get you in the door whether you buy or not. Dealers also incur thousands of dollars in interest charges each month (floor plan expense) to finance their new vehicle inventories. Now on the other hand, you have 4 fingers and a thumb. Ha! Most manufacturers pay their dealers’ holdback, a 2%-3% margin built into the invoice cost to help offset expenses. Many manufacturers also pay floor plan assistance when dealers effectively manage their inventories. In other words, when dealers turn their inventories quicker, they can buy more cars more often and in turn, the factory will help defray floor plan expenses. Dealers also get paid a stipend to prep the vehicle so it’s checked and ready for sale. These are the hidden income streams you will read about.
So, let’s just say for simplicity sake that all the dealer’s costs associated with advertising and floor plan expense are offset by subsidies paid by the factory. If this is a close assumption, then invoice price is the cost to put a new vehicle on a dealer’s lot ready for sale (not withstanding expenses like rent, payroll, gas, electric, etc, etc.). So, as a consumer, if you truly believe you should be able to buy a new vehicle below invoiceâÂ?¦ then I suggest you take your 3-10 million dollars and go buy a dealership. The factory will be happy to oblige you with more vehicles then you could possibly buy at below invoice pricing. Then you can have the pleasure of dealing with all the people just like yourself. Oh, and something else you may want to know; after the dealer does pay their employees and all other expenses, the average dealer in America puts 2 pennies to the bottom line for every dollar spent in their store. So you better be a damn good operator after you put up your 5 mil. Any other funds that dealers receive such as year end close-outs, etc are published everywhere.
3) Now, let’s get back to buying a new vehicle. Email at least 2 dealers in your area for a price on a specific vehicle with your desired options. This will educate you on where the market is and how flexible you may need to be regarding models and options. Have at least 2, maybe 3 colors picked out that you would consider. If the dealer doesn’t quote online pricing then they probably have a valid reason, so don’t disqualify them from your search. They may be the best overall candidate to buy from. It really doesn’t matter anyway because they could tell you anything to get you in the door. Also, the vehicle you’re shopping for is already in your price range or you wouldn’t be considering it right?
4) Research your trade-in if you have one. Go to kbb.com, nada.com, and/or Edmunds.com. Be sure to choose the “trade-in” category, not “retail” or “private party.” Value your vehicle logically, not emotionally or you will be setting yourself up for disappointment. If you have a nice vehicle the dealer will try hard to trade it. If you have a sled, admit it to yourself. Regardless of how you interpret what the guide books say, do not value a 70,000 mile vehicle as excellent condition. It has 70,000 miles worth of wear and tear. If your vehicle is starting to nickel and dime you, keep that in mind. Has your vehicle had previous damage? In the eyes of a dealer, an excellent condition vehicle is no more than 4 model years old, driven 10,000 miles or less per year, 1 owner, never been smoked in vehicle with new tires, no body or paint work and a current state inspection sticker. Is that your vehicle?
5) If you use websites other than the manufacturer to get invoice pricing, be aware there are legitimate, miscellaneous itemized fees that will show up on an invoice i.e. port fees if applicable, destination charges (also on the sticker), ad association fees, etc. Do not accept any costs that are hand written on the invoice unless they are accessories already installed. Most dealers will show you the invoice, but if not, don’t be concerned, you pretty much know the numbers. Being prepared and knowledgeable are your best resources when buying anything.
Now, let me suggest a notion that you as a consumer may think absurd, ready? “A fair price to pay for a vehicle is the MSRP or sticker price on the window.” “There you go, I said it, so how do you like me now?” I make this suggestion with 1 valuable consideration to bear in mind; and that is, salesmanship. Did the salesperson satisfy your needs by showing you the right vehicle, did he or she remember your name(s), did they create enough value in their presentation to convince you that sticker price is a fair price, how was the test drive, did they provide answers to all your questions, did they value your time, what is their customer satisfaction rating, etc? Could you buy it for less, sure? However, as soon as you drive away happy the price becomes unimportant.
Manufacturers are also helping create value by lowering the MSRP on vehicles instead of offering rebates. Think of it this way, if a manufacturer can give you a $3,000.00 rebate then they’re charging you $3,000.00 too much to begin with. Also, in some states consumers pay sales tax on rebates. Therefore, the fair thing to do is lower the MSRP, which is precisely what they are doing.
Keep in mind that due to supply and demand some vehicles command sticker price. But in my opinion, only if the salesperson has salesmanship, make them work for it. Just because they have a hot vehicle doesn’t mean they don’t have to make the effort.
When shopping, have a good idea of how payments relate to price. Don’t expect to finance $25,000.00 with no money down for 60 months at $400.00/mo. Even at 0% interest the payments are slightly higher than that, be prepared. Be open to a lease, especially if there’s a high probability you won’t keep the car, the bank owns it regardless. As a consumer, you’ve been conditioned by advertising to believe that the end of the month is the best time to buy a vehicle. Yes, dealers do need to hit their volume objectives, but they start achieving that on the first day of every month. Every deal everyday is important, so there’s no need to wait.
6) Try to buy in your community. Most dealers spend a lot of money supporting ball teams, high schools, hospitals, scouting, hospice and other charitable causes. YOU ARE NOW READY TO VISIT A LOCAL DEALER. Be confident, you have a reasonable expectation of what your trade is worth. You have a pretty good understanding of what the dealer paid for the new vehicle. You’ve done some online comparison pricing. So let’s go.
7) When you get to the dealer, be prepared to spend at least 1.5 hours to walk through the process. Be prepared to select a vehicle, get a presentation, take a test drive, fill out a credit application and be prepared to buy. Never rush into a dealership and tell the sales associate how valuable your time is and you need the cheapest price on a vehicle you haven’t driven. I once had a manager ask me if I ever sold a vehicle to someone who didn’t test drive, I had to say no. Also, don’t let your salesperson start qualifying the deal until it’s time to negotiate. No price talk, no payment talk or down payment talk until you’ve reached that step. They have to sell the car first before they sell the deal. If you don’t like the vehicle, the rest doesn’t matter. Now, as long as you’ve committed yourself to spending thousands of dollars, enjoy the process. You have already thought this decision through, you’ve done your due diligence and the negotiating cards are stacked in your favor. So let the salesperson do their job and you’ll both have fun. Joke with the salesperson and tell them “I expect to see the best presentation you’ve ever done.” “I’m prepared to spend a lot of money today, so I need to see value.”
8) When negotiating, always come to a bottom line first, and then figure down payment and monthly payment. Do not throw out ridiculous offers below what you already know is reasonable. Don’t let negotiations turn into a bartering contest. Why waste your time? Everyone needs to be credible and honest. Keep in mind that the word profit is not a 4 letter word. People in business need to make profit. Unless you work for the government, your job also depends on profit, which allows you the luxury of that nice new car. Say this to your adept sales rep, “show me the numbers on the road including taxes and license fees and if I feel it’s fair, we’re done.” “If I think you need to sharpen your pencil, I’ll tell you, I’m here to buy.” If the salesperson doesn’t ask you to pay sticker price then shame on them. They must know in their heart they don’t deserve it. If you want to have some real fun, say this to your salesperson “I know you have to make money and I want you to be able to eatâÂ?¦I just don’t want to see you gaining any weight.”
If you have to stretch your payments past 60 months on a purchase or 42 months on a lease, then you probably can’t afford the vehicle. Most people like to think they will keep their vehicle beyond the term of the loan, but in reality, they trade within 42 months or sooner. Most people never consider their negative equity position until they try to trade before their loan is paid off. The longer the loan, the more negative equity.
Never put a lot of money down on a lease, only what’s required. If you drive more than the standard miles allowed then ask the dealer to calculate the additional miles into your payment, or what it would cost to buy the miles up front. It might not be to your advantage to lease at that point. Often times a 36-39 month lease has a similar payment to a 60 month loan. Insurance premiums typically go up with a lease.
On a 60 month loan, if you keep your vehicle in good shape with reasonable miles, you might reach an equity position around 42-45 months, depending on your initial down payment. If you added negative equity from a prior car, you’ll probably never reach an equity position unless you covered your negative equity with down payment. The point is this; it’s nice to be emotional and happy when buying, just be logical when justifying your payments.
Regardless of whether you buy or lease, take good care of your vehicle. I believe in letting the dealer do all the maintenance so you always have recourse at the source. You may pay a bit more, but simple things like the wrong oil filter can cause irreparable damage to your engine, I’ve seen it happen. Keep in mind that all vehicles lose value, so you might as well keep yours in tip top condition. Besides, when you get to the dealer, you’ll want to visit with your gregarious, gracious, grateful, well groomed, affable sales representative.
9) If you’re going to buy a service agreement, always buy the top of the line. Be sure it covers at least the term of the loan and the miles you will drive. The reason I suggest buying the best service agreement is because everyone hates hearing the words, “I’m sorry, but that part isn’t covered.” The best way to have your salesperson or business manager disclose a service contract is to have them tell you what isn’t covered first. If you are leasing, I don’t recommend a service contract because most factory warranties are at least 36 months or 36,000 miles. Always buy gap insurance. Gap insurance pays off your negative equity in the event of a total loss. Gap is typically built into a lease.
If in the past you’ve had a few bumps in the road where credit is concerned, allow a little extra time for the dealer to place your loan. Bear in mind that dealers are often charged hundreds, sometimes thousands of dollars in fees by higher risk banks to secure loans. A deal has to make sense for all concerned.
10) Be sure you’ve been properly introduced to someone in service and your first oil change is scheduled. Then www.hugyoursalesperson.com, give them a kiss on the cheek, thank them very much and enjoy your new ride. Tell everyone you know what a great buying experience you had because you were prepared. Now, because the automobile business is all about the deal, what’s in it for you when you start referring everyone you know? This is so much easier than teaching salespeople how to sell a vehicle.
