Buying Brand New Vehicles

This particular entry is about buying BRAND NEW CARS. If you have a few extra minutes scroll down to read my previous entries about the auto industry.

For starters, I am not a big fan of buying new vehicles because of the expensive depreciation, on-going payments, high cost of insurance and the interest rates that accompany these purchases, but if you are in the market for a BRAND NEW AUTO, and if you don't mind saving money, here are some good things to know:

• All dealers pay the same basic price for the vehicles. You can find out their price by checking on line. A few places to check are InvoiceDealers, Cars.com and MyRide.com.

• Depending upon your point of view, there are several different “prices” for any new car. You should be familiar with all of them. 1) The Manufacturers Suggested Retail Price (MSRP) is top retail as indicated on the sticker. Dealers love buyers who actually pay that amount. 2) There is the dealer’s “list” price. They may try to tell you this is what they paid for the car, but that is misleading, because there is some “fancy accounting” going on. More on that in a moment. 3) There is the dealer’s “actual cost”, which is lower than the list price.

• The dealers get to keep a hold-back fee of two to three percent of the list price on every vehicle they sell. On cheaper, entry-level cars that will be a few hundred dollars but on top-end luxury vehicles it can be a thousand dollars or more.

• The dealer also gets factory kickbacks in the form of incentives from the manufacturer. These might include year-end closeouts or other promotions, including highly profitable “loaded” cars. That is why so many of the cars on the lots have expensive extras.

• Therefore, when we take into consideration the hold-back fee and the manufacturer’s incentives, a dealer can actually sell a car at below the list price and still make a handsome profit. But they will try to get more, a lot more.

• Most dealers like to charge $300-600 for “dealer preparation” fees. This is strictly another profit-grab because part of the purchase price is supposed to cover this service. Ask your salesman what the philosophy is before you make any offers. Tell him if the dealer wants $500 for “preparing” a vehicle that he is supposed to prepare anyway, you will lower your offer accordingly. I would not pay more than the list price for any car that carries a dealer prep fee.

• There is a similar issue with “destination” charges. Some dealers will put their own sticker on the vehicle and add an entry for transportation or destination charges. This is just another way to increase profits because the transportation fees are already built into the list price. If you pay extra for destination you are paying twice for the same service. Therefore, beware of customized stickers.

• When we add the hold-back fee plus any manufacturer’s factory incentives and dealer preparation fees and destination charges the dealer can easily make $2,000 even if he sells the car at his list price. But that does not stop him from marking up the asking price even more, and that is where the MSRP comes in. As far as I am concerned $1,500 over the dealer’s actual cost is plenty of profit for entry level vehicles (below $20,000) and $2,000 is the maximum for any vehicle.

• Once you find a model you like, ask the salesperson if they have more of that model from which you can choose. You are going to do that for three reasons: First you want to see if you like any particular car more than another. Perhaps you like the gold one or the four-door model. Second, you are finding out how much inventory they have because their motivation will vary depending on the circumstances. If they have only one or two of that model, there may be good demand for it and they may be inclined to hold firm on their prices. But if they have plenty of inventory, or if they are closing out a model, you will know not to pay more than a couple hundred dollars over the list price.

• The third reason you want to look at a bunch of cars has to do with all of those extras they have on them. Dealers love to sell “loaded” cars because they often get factory incentive kickbacks, but you can actually use that against them. So, get a note pad and look on a bunch of the stickers to determine how much they charge for the individual extras like pin stripes or upgraded tires etc. Write down every item and its cost. Now ask yourself this question with each item, “If I already owned this vehicle and it did not have that item, would I be willing to go out and buy that item for the price on the sticker?” If you are looking at an air-conditioner and you live in Texas or Arizona the answer would most certainly be, “yes”, but would you pay extra for air-conditioning if you lived in Alaska? What about that fancy $400 stereo? If you already owned that car would you be willing to shell out an extra $400 for that system or would a simple CD player or Am/Fm radio do just fine? Fifteen minutes on this exercise will reveal a lot.

• Once you have a good wish-list, you can ask the dealer which vehicle is the closest to what you like. There is a good chance they won’t have your ideal car, but you can still get it or a very deep discount to take one of his loaded cars. Tell the salesperson their cars are too expensive because they are loaded with things you don’t want. Advise him that you intend to contact a Fleet Manager (These are very common, especially in larger dealerships) to special-order your vehicle. At this point, he knows he has one last chance to make a commission and will probably be inclined to remove nearly all of the profit from the extras if you will take one of his cars off the lot.

• If he does not satisfy you, go home and call a fleet manager in that dealership or a competitor, and special-order your new vehicle with the extras that you want and no others. There is no sales commission. I custom ordered an SUV this way and saved several thousand dollars on extras that meant nothing to me. It took six-weeks to get the vehicle, but there was some extra pleasure in the wait: sort of like looking forward to your vacation.

• Eventually you will have to enter the negotiation process, but how much should you offer? There are several approaches. You can do like most people and just wing it. I bet you can guess how well they do.

• Another approach is to gather all of the data you can from this book and other sources and then make your wisdom known and take your chances. At least the salesman will realize that you are not a complete dummy and you will probably do okay.

• If you don’t have the time or desire to do all of this homework you can use a simple formula to determine how much the dealer will accept. Here is how it works. Put the number “1” in front of the first digit in the MSRP, and that is the percentage you can deduct from the MSRP. As an example, suppose the vehicle has an MSRP price of $32,500. In that event, the first digit is a “3” so put the number “1” in front of “3” and you get “13”. Therefore you can reasonably expect the dealer to accept a 13% discount. In this case, that means your target price would be $28,275, provided there are no dealer prep or destination fees. If you have one of those stubborn dealers who will not sell without those fees, then you will lower your target price accordingly. Let’s do another one. If the MSRP for your new luxury SUV is $50,000, the first digit in the MSRP is a “5”. So put a “1” in front of the “5” and you get “15”. Therefore you can reasonably expect to get about 15% off, or an adjusted price of $42,500. Once again, subtract for any dealer prep or destination fees. Naturally, these numbers vary among manufacturers, models, dealers and other circumstances, but they are usually in the ball park.

• My suggestion is that you avoid all of the above and use a professional buyer service. Some of them sell the cars directly to you, but others negotiate for you, as your agent. In the latter case, there really isn’t much “negotiating” involved. They know the dealers actual cost. They add a modest profit for the dealer and a fair fee for their own services (finding the vehicle and knowing what to pay) and that is your price.

There are plenty of these companies so the competition forces them to be reasonable. Since there is no other overhead, such as commissions and dealer prep, it is very unlikely you will beat the deal that a professional buyer will get for you. My favorite company is CarsDirect.com. They have been around a long time. You can go to their site at any time and plug in what vehicle you like. They instantly show you the MSRP and your cost if you decide to use them. You do not have to provide any private information to see how it works. The only information they ask for is your zip code so that they can consider the shipping costs.

What do you think?

Check back in a few days and I will share with you information about buying USED CARS.

Be sure to check out my other blog, currently discussing Illegal Immigration.