The Inner Workings of a Car Dealership (and How To Use Them to Your Advantage)
Published on - August 26th, 2008 (by J.D. Roth) Yesterday a reader named Dave Black left a long comment on an old article about how to buy a new car without getting screwed. This is his glimpse into the inner workings of a car dealership. I’ve edited Black’s comment to make it a little more readable, but the advice is all his.
I sell cars, and believe me, there are lots of opportunities for a car dealership to make money.
Front of the house profit is derived from the MSRP less the invoice price (the price the dealer actually pays for the car). Each deal has a “pack charge” or “lot fee” of $200-600 or more that goes in as part of the dealer cost, so when a dealer tells you for example, our invoice is $22145, you can subtract $200 to $600 for the lot fee. There are also dealer rebates and consumer rebates to factor in.
On the sales contract there is always a “doc fee” of again several hundred, and a fee for title processing and sales tax. All but the sales tax can be negotiated.
Never trade your car in unless it has major problems and you just need to dump it. You don’t really know how much you are getting off the new car for the value of your trade. Most dealers I have worked for use “rough black book”, which is a number that they can start with before they do an appraisal on your car.
The back of the house profit comes from the finance office. Let’s say you have great credit. They could qualify you for 5.5% loan or less, but the finance manager may hit you at 7.5% and tell you that’s the best he could get. This can be negotiated, too. There is a lot of money being made on raising your interest a couple of points.
Do not buy any add-on service contracts and warranties. The profit on those is 50-100%, and the finance manager is a commissioned salesman. Remember that!
Do not try to bluff or BS anyone in the dealership — they are a lot better at it than you are, and they do it far more often.
Most salespeople do not make a lot of money. I have made as little as $300 a week and as much as $3500 in a week. My average is around $40,000 a year working five days and 55 hours a week. It’s a difficult job. The salesman is trying to negotiate between you and his sales manager. He is more on your side than you might think. He wants referrals, and he will work you hard after the sale, so he wants you to understand that he is going to get you the best deal he can and still make a profit.
Most deals on new cars pay minimum commission — $100 to $150 — because the profit margin on new cars is lower and the competition is higher. You can easily compare prices on new cars because every dealer sells the same car. Used cars have more profit built in, and there is no simple way to price shop because condition and mileage on each car varies so much.
Do not offer a price that is way too low. Be realistic. We are there to make a profit, and we must not sell cars at a loss. Give us a break. Don’t lie or steal from us, and we will treat you right.
The best time to buy a car is end of the month and before the new model year comes out. Monthly bonuses for volume can be very good, so they might be more willing to do a loser sometimes and make up for it on bonus.
Most dealers and salespeople are good honest hard-working people with families and lives like yours. Treat them with respect — they deserve it.
Driving through a lot drives us crazy. If you are really interested in looking at cars, stop and get out and let one of us open the car up and give you a demonstration. If you aren’t really ready to buy, go to the lot after hours so you’re not wasting anyone’s time but your own.
Once I had a customer came in and tell that me he and his wife would like to check out a couple of cars. He said he would give me $20 to work with them for a while even if they did not buy. I liked this. Now the salesman is motivated to work for the customer as well as the dealer — he can’t lose either way.
J.D.’s note: Black’s comments about financing made something clear for me. The last time I bought a car, I thought I got a good deal — $500 over invoice. But I was surprised at the relatively high interest rate. “Are interest rates really that high?” I asked. “Yes,” the salesman said. I didn’t know enough then to argue the point. I just took the high interest rate. Now I know it was a way for the dealership to make back the money they’d given up on the sales price. Chevy sign photo by rjs1322. Negotiation photo by Tony Lanciabeta.
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I have found car dealerships very frustrating. I can appreciate that they just want to make a living, but I just want some honesty.
Invoice prices are often not really invoice prices – there is an additional profit margin built into the “invoice price”. This is why middle aged men often walk out of a dealership with lower price quotes than younger potential buyers (women especially). When I went to buy my first car my father went to the same dealership, priced out the same car from the same sales rep, and was quoted a price nearly 10% less than had been quoted for me. He told both of us that this was “one dollar over invoice”.
For my second car purchase, I was unable to get some dealerships to quote me a price for their cars. They would not talk to me unless I told them the “monthly payment I felt I could afford”. I had saved for several years so I could pay cash for a car – and after several hours at different Big 3 dealerships I ended up buying foreign since I could not get a single quote for any U.S. car.
Finally, I can appreciate that depreciation is a significant loss in the market value of the car – but I drive my cars until they are dead (average life of more than 12 years each with more than 200,000 miles) and unsalvagable. I do not care about market depreciation, I only car about service-flow depreciation. Every person I know who has bought used has had service-flow problems – the cars do not last as long. I know that not all used cars are lemons, and not all new cars are cherries – but I have never had a problem with my new cars. I buy small, inexpensive, fuel economy cars and take care of them. When I am in year 10 and roll +200k miles, the amount of market depreciation in years 1-4 is irrelevant. At +200k miles, the car has no market value. Its value is in the services (service flow) that it provides to me. The odds of finding a similar used car with an equal useful life but also offering cost savings are pretty slim/zero. By buying new, and keeping until the day it dies, I have a car whose use/abuse is completely within my control. I also do not have to expend all the costs associated with researching, hunting, finding and contracting yet another used car deal every couple of years.
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Ok my question is about getting a warranty, I know the dealership makes money on the warranties, but in my experience nearly every new and used car has to go to the shop, and if you can get a GOOD warranty it will easily pay for itself and then some! Am I crazy?
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@Kirk – “When I am in year 10 and roll +200k miles, the amount of market depreciation in years 1-4 is irrelevant.”
That’s not not the whole story. If you had bought that car when it was three years old, it would last only 7 years instead of 10, but you’d have the three grand you saved at purchase time to cushion the blow. Invest that at 5% while you’re driving your car, in the mean time, and you’ll have almost 4 grand toward your next car.
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My worst experience dealing with a used car salesman was this jerk in Midland, MI…. He came up and asked what I was looking for, I put out a list of my requirements. Told him payments of no more than $250 a month, good gas mileage, NO SUVs, 4 door, and the backseat had to fit my infant son’s carseat.
First car he shows me? A 1998 2 door Grand Prix. Over 100,000 miles, and they wanted $13,000 for it. Told him to try again.
He kept suggesting vehicles that didn’t match my description, then when that didn’t work, tried to talk me into a brand-new Ford Edge for $398 a month. After wasting 2 hours of my time (and me trying to deal with a cranky, hungry infant) I told him I’d look elsewhere. And he had the nerve to scream at me after that for wasting his time. Crap, I should have left after his first suggestion. (Seriously, a 2-door car? For someone with an infant?)
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Arguments about if I should or should not pay with cash aside.
If I’m looking for a 10,000 car and I have cash. Is it a good or bad thing to tell the salesman that I plan to buy with cash?
It seems like they might not want to give me as much of a deal since they can’t make up any profit on a loan. Or will they be more eager to sell because they want cash?
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If you have the money saved to purchase your car, you put that money into a CD at your bank. Borrow that same money against your CD at 1.5-2 % interest and pay it back over however many years you wish. After you pay off the CD you have the cash you saved up already, you have the vehicle, you didn’t have outrageous insurance rates, you have clear title, and the stealer (I mean Dealer) cant hold that financing cr#p over your head. They will deal with you! Deposit that check in your bank account that you just borrowed or get a cashiers, You can set there and pester them all day like they would you. Wear them down to your number! Or they call the cops and have you escorted off the lot.
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Interesting post. It is innacurate that Extended Srevice Contracts have a 50-100% markup. As a Finance Manager of a franchised dealership, we have always marked up the esc for a reasonable profit.
The peace of mind an esc provides is invaluable and the ones provided by the dealership are the best value.
Compare the dealership esc to one of the aftermarket ones that bombard your mailbox as solicitations.
To research a “well-run” automotive F&I Department, visit:
http://www.AutoFinanceInsider.blogspot.com
AFI
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It’s amazing in these times we stil have people speaking out of one side of their mouth. As our country struggles you continue to publish only the dark side of a small portion of DEALERS. Why cant we talk about the great deals and the full disclosure most dealerships use these days. GET THE FACTS, BOTH GOOD AND BAD. I know thats tough for a writer, but try it.
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tHERES NOTHING MENTIONED HERE ABOUT THE “DEALER hOLDBACK” FROM THE MANUFACTURER. I accidentally got a hokd of a sheet which told the true price and it also showed the dealer holdback numbers. I went to another dealer about an issue with the same vehicle even though i did not buy from him because his sales people said they were not ordering anymore vehicles of that current year. So i bought from a dealer who was still taking orders. When the dealer i know heard it he was aghast. But he saw the dealer holdback numbers on the sheet. No dealer ever sells a car at cost. If they say they do they are lying. Do they ever sell a car below cost? No they are lying again. They know they have a holdback and things called “spiffs” from the manufacturer. However, the real money is not made during your negotiation with the salesman or the “closer” who comes in “to make your mind up for you”. The real money is made in the finance office. There is where they can extract $2700 in profit from you by going through their financing and selling you wax jobs and undecoating and fabric treatment and extended warranties all of which are valueless.
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JD,
I believe you had good intentions on sharing some of your knowledge but, as a finance person, I can tell you that some of your ideas fell short. Recommending people not to buy warranties is irresponsible! Many people can not afford the high price of car repairs in their budgets and as long as they are getting a fair price, you should be recommending them to your readers.
People should have coverage to match their plan of ownership.
In fact, this is the only time you can negotiate your repairs, otherwise you will be paying whatever the bill is. Consumers spend so much time and effort researching and negotiating their selling price and then pay full price for repairs later … it makes no sense!
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With the $4,500 vacher the government is handing out. I might have to buy from a dealership
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There are some dealers who are reputable and others who should fold. Few auto sales personnel are properly trained, their management are “wanna be” professionals and the owners are nothing more than crooks. The American automobile is manufactured just fine, but the distribution channels (dealers) cause the manufactures the great pains of failure. All dealers should be factory stores. This would improve retention of qualified sales personnel, eliminate “make believe” sales managers, improved training, and compliance guided F&I people (hopefully somewhat educated, as most are NOT). Just about every F&I manager interviewed couldn’t explain the difference between simple and compound interest.
ESC is a joke and a rip off, it overlaps factory warranties, covers very little (deductible included), and who can expect a fight when that contract is exercised. As for dealer generated financing, by law these dealers can charge up to 3% more, and they will exercise that option.
As a previous writer indicated, the sales people are human. One must feel sorry for these poor souls who stand around most of the day/night waiting to pounce on the first prospect. They can’t explain anything technical about the vehicle or anything that might be historical. The training received (generally Control, Inc.) is a hair below pottie training and designed to “control” the consumers buying decision.
Bottom line, convert all dealers (if not factory stores) to test drive and pick up terminals. Shop your vehicle on-line, select multiple dealers web sites, arrange your financing on your own and most importantly eliminate the out dated dealer experience.
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I don’t buy from dealers anymore. They operate on a system that was outdated 40 years ago. They lie, cheat and are for the most part, slimeballs. I only buy from private parties. Saturn had a good business model. Not sure why it wasn’t more successful.
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I don’t see any discussion about ADM (additional Dealer Markup). This side sticker usually bumps the price dramatically. Sales use the pad created by the ADM to give you a good deal on trade, or purchase price.Don’t fall into this trap of barganing “down” from their ADM price, bargain for their profit only and have available their real purchase price, holdback and incentive numbers if you can get them.
When you get your monthly payment number, check to see if they have rolled all of the add-on stuff into it, especially if you have given them an amount that you are willing to pay monthly (and they know you will really pay 10-20% more than that if they have done their job of selling the sizzle of a new car). Once you give a monthly amount, they will find a way to get you there with all the add-ons, even if is a 72 month contract.
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@headcase – Because they were Saturns.
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I have been in the car business for over 10 years and have heard all the crap i’m hearing here everyday, so let’s set some things straight. First the guy who wrote this is hearing “i’m just looking” from every customer and getting frustrated by it, is probably not cut out for this business. However, I will give him props for mentioning the customers that just drive through and wave. Roll down your window and give us the same courtesy you would a salesman at a department store.
“fake invoices” This is a thing of the past LONG before I got in this business. If a dealer shows you an invoice it is printed directly of the manufactuars website that they provide to dealers.
“hold back” yes there is hold back we have to make money somehow. However 9 times out of 10 the salesman does not get paid off of it. Would you sell your house for less than you have in it? Didn’t think so.
“you got ripped off” I know there are shady dealers out there that confuse people and then laugh about it but most don’t. Most of the people who think they got ripped off are the people the salesman made a mini (minimum commission) on. However in the cases where someone paid too much due to there own negligence let me ask you one question. if someone offered you full asking price (sticker) or above for your house would you tell them you couldn’t sell it for that much? Didn’t think so. If you think car dealers are ripping you off because of there huge mark up and low trade ins, look at the furniture industry. Most furniture is marked up at least 100% not like the 4-12% (12% being highend cars) dealers have. the reason you don’t complain or feel it is simple… You don’t trade in your couch on a new one.
and finally financing… can we mark up the interest rate… absolutely, so does your bank. Do you really think they are buying their money at the same apr they are loaning it to you at? NO, they are making money on you too. Solution… finance with the dealer but use a credit union that they offer. Credit unions pay the dealer a flat fee and the dealer is not allowed to mark it up.
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LET’S MAKE THIS SIMPLE SINCE NOBODY OUT THERE FEELS A NEW CAR DEALER SHOULD MAKE A PROFIT…PAY STICKER PRICE..THAT IS PUT ON BY THE MANUFACTURER NOT THE DEALER.
AND HEADCASE..WHERE DO YOU GO WHEN YOUR CAR NEEDS A FACTORY WARRANTY OR RECALL DONE?? HOW ABOUT THE DEALER. GREAT ADVISE.
AND SPEAKING OF EXTENDED WARRANTYS..I SEE FOLKS CRYING ALL THE TIME IN THE SERVICE DEPARTMENT WHEN THEY ARE HANDED A $1000 PLUS BILL ON A 60K MILES CAR..MORE GREAT ADVISE ABOUT NOT BUYING A WARRANTY..
WALK IN OUR SHOES FOR ONE WEEK!!
FLORIDA CAR SALESMAN
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@ MattS Says: Re cash.
It makes no difference. The dealership gets the money whether it comes directly from your pocket, or from the finance company. So it is not going to make any difference on the price that the dealer is going to sell you the vehicle for.
They would in fact prefer you to finance through the dealer, as this is a source of income for them.
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Car salesman are for the most part the bottom rung of the evolutionary ladder. They lie cheat and steal right from under your nose.
The best way to buy a car is to research invoice, then call the fleet mngr to buy at $150.00 below that price with your own financing.
Extended warrantys are a huge waste of $$ only idiots buy them, very few people who buy new cars keep them 60K+. Used car buyers may benefit from them, as they may own into the twilight years of a daily driver.
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Bob, “Car salesman are for the most part the bottom rung of the evolutionary ladder. They lie cheat and steal right from under your nose.” if you fell that way you need to educate yourself before you go buy a car. Most people that get “ripped off” are uneducated about buying a car.
I have NEVER lied to a customer and never will to sell a car. I’ve been on both sides of the desk and know how I would like to be treated and I treat my customers the same way. I work hard at my job to support my wife and daughter, which is what most car people are doing. Trying to make a living.
Maybe you people that want to bash salespeople should try something. Treat them with respect and you’ll get treated with respect in return. If you don’t move on and find a slaesperson that will.
We can pick up on your “better than us” attitude real quick, and I can only speak for myself here, I return the favor.
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This seems to follow what I’ve been reading in a free, online book on how to buy cars. If you want even more tips check out:
http://www.carbuyingtips.com
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