Monday, February 10, 2020
Have you ever wondered why virtually all car dealers do this? Imagine that you owned a Ford, Honda, Chevrolet, or Toyota dealership in Southeast Florida. Each of these car brands has as many as 20 dealers and no fewer than 12 selling the IDENTICAL product. Toyota has 19 car dealerships between Ft. Pierce and Key West. Every Toyota dealer pays Toyota the exact same price for their cars; but Toyota dealers don’t sell those cars to their customers for the exact same price. They mark up each car as much as they can…the highest price that the customer will pay. If a Honda dealer sells 25 identical Honda Accords in a given month, the likelihood is that each sold for a different price; the typical variation in profits on the identical vehicle can range from a few hundred to a few thousand dollars.
Let’s say you owned a Honda dealership. The Honda manufacturer gives you a quota…a minimum number of Hondas you must sell monthly and annually to fulfill your contract allowing you to sell Hondas and often to receive volume cash bonuses. The only way you can do this is to price your Hondas “competitively”. But, you also must maintain a high enough markup on each Honda, so that your dealership remains profitable. This is the “Catch 22” and dilemma of all car dealers. A South Florida Honda dealer has EIGHTEEN other Honda dealers advertising the same cars he sells. If you advertise a Honda Accord for a higher price than most other Honda dealers, you won’t sell enough to meet your quota; if you advertise that Honda Accord for a lower price you’ll sell lots of Accords, but you’ll lose money on every car.
Therefore, all Honda dealers and all car dealers of all makes see only one viable course of action. Advertise their cars at a very low price, lower than their competition (and lower than they can or will sell the car for), so that the customers will come in to buy. Once the customer is in the dealership, the “games begin” to raise the advertised price to a price as profitable to the dealer as he can negotiate. The tools the dealers use to accomplish this are many…hidden profits (aka dealer fees) disguised as government fees, dealer pre-installed accessories, and switching the customer to a different vehicle or a lease rather than a purchase.
Car dealers see themselves as having no choice but to sell cars this way if they’re to remain in business. They blame their actions on the auto franchise system and there is some truth to this. Apple sells you iPhones directly, but Toyota cannot sell you a Toyota directly; car manufacturers MUST sell through their dealers. This system is mandated and entrenched by state law in all 50 states. The manufacturers created the dealer franchise system in the early twentieth century because they couldn’t sell their cars fast enough directly. Once a critical mass of dealers was created by the auto manufacturers, the dealers organized and lobbied their state legislatures to created laws protecting their franchises from the manufacturers. The main reason they did this was because the manufacturers were granting franchise agreements to too many dealers…” over-dealering”. Too many car dealers selling the same car in a market creates too much competition because it drives the prices down. Unfortunately for the dealers, there were (and are) already too many. Today, car dealers are overprotected, enjoying exclusive markets with state laws making it almost impossible to control, much less, eliminate even the most “problem” car dealers.
The auto franchise system is over 100 years old and obsolete, but it’s entrenched and will remain for the foreseeable future. New vehicles will, one day, be sold online directly by the manufacturers and maybe even through Amazon or Walmart. Vehicles will be built to order and delivered within a week. The price you see will be the price you pay, and you will be able to return the car for a full cash refund if you change your mind. Service, maintenance, and repairs on modern vehicles is minimal. Separate service centers will still exist to handle this need. Service centers will also have new vehicles of each model for you to inspect and test drive. Tesla is doing today exactly what I described, except for the one-week delivery time and unconditional moneyback guarantee.
But there’s a larger reason why car dealers get away with their deceptions. That is “because they can”. Auto manufacturers realize they’re stuck with the dealer franchise system and “if you can’t beat ‘em, join ‘em”. Auto manufacturers have huge political lobbying clout and, when you add the car dealers and their associations’ money, state and federal politicians have no choice but to “play ball”. There are about 17,000 franchised car dealers. They have enormous lobbying power nationally through NADA, the National Auto Dealers Association, and they also have enormous lobbying power in all 50 state legislatures. The political donations that Big Auto and Car Dealers give politicians make the NRA look small by comparison.
Monday, February 03, 2020
A woman wrote me a letter in response to one of my columns. Her husband had recently passed away and this was the first car she’d bought on her own. The dealer didn’t have the model car with the accessories she wanted and was unable to locate one at another dealership. She didn’t want to decide without seeing the actual car she wanted to buy, but the salesman and manger talked her into signing a buyer’s order, assuring her that she was under no obligation to buy. They also included two accessories that she did not want because “the manufacturer required it”. I’ve heard of distributors ordering cars with certain accessories from the manufacturer which essentially makes them “standard”, but never “$250 floor mats” which was one of the accessories she mentioned. I get a lot of emails, phone calls, and letters from people who made a bad deal in their car purchase and want to know how they can get out of it. This is one of the less egregious, but I chose it because it was a simpler and shorter example.
There is strength in numbers when shopping and negotiating to buy a car. In fact, this applies to any serious decision in life. You might be the sharpest, shrewdest negotiator on the block, but your odds of striking a better deal and not get taken advantage of are enhanced when you have witnesses on your side. Personally, I make a habit of always having at least one partner when I am engaged in a serious, adversarial decision-making process. When meeting with those on the other side, I make it a point to arrive with at least as many people as they have present. One reason is the psychological factor. When you are in an office by yourself with 2 or 3 others, it can be intimidating. Another reason is that you always have people on your side to corroborate what was said. If a salesman or a sales manager makes a verbal promise that can be corroborated by a friend or two, it is far less likely to be broken. It will also hold up in court, if it must come to that. Of course, the better solution is to see that all promises are committed to writing.
Buying a car, especially a new car is often an emotional decision. Having a friend or two with you can help you make more of an analytical, logical decision. Another point of view is always useful when making an important decision. Also, having one or two friends with you slows down the process to a level more easily absorbed and understood by you. A friend will often think of a question you should have asked but forgot.
Ideally you should bring someone with you who is skilled in negotiation and experienced in buying cars. However, if you don’t know someone like that, somebody is better than nobody.
By the way, most car dealers are unhappy when prospective customers bring in advisors and friends. Naturally they feel that way because they recognize their chances of making a fast, very profitable sale are diminished.
Monday, January 27, 2020
Of course the motivation to do this is more profit for the dealer and a bigger commission to the salesman. That’s not to say that leasing a car is always more costly than buying one, but it can be if you’re not careful. And not being careful is exactly what happens when a purchase intender becomes a lessee. You likely did all your homework and due diligence based on a purchase. Suddenly changing to a lease, puts you totally at the mercy of the salesman.
Here’s how it happens. You come into the dealership to buy a car. You may have seen the dealer’s advertisement in the newspaper or TV for a model. More than likely you are prepared to make a down payment and/or trade in your old vehicle. You have a monthly payment in mind because almost everybody has a budget and we usually translate most purchases into whether we can fit them into our monthly budgets. You negotiate the best price you can to buy the car, or maybe the sale price is good enough. Or, more and more often, the advertisement that brought you in showed a leasepayment, not a purchase payment. Dealers use deceptive language like “Drive this car for just $299 per Month” or “Take this Car home for Just $200 per month”. Notice the words buy, own, or purchase are never used.
Now the salesman, or more often the F&I manager/business manager tells you what your monthly payment will be. Let’s say that you have a trade-in worth $15,000 and aren’t going to put any cash down. The F&I [Finance and Insurance] manager tells you your monthly payment will be $427 per month. But that’s way more than you can afford, and you tell him you can’t buy the car because you can’t afford that big a payment. He asks you how much you can afford, and you tell him it must be under $350 per month. Now he has you set up perfectly for the “lease flip”.
“Mrs. Smith, I think I have just the right thing for you. What would you say if I told you that you can drive that new car home today for just $349 per month?” You say with glee, “we have a deal!” Guess what? You’ve just been flipped. If you had bought the car at the advertised price or negotiated a very good price, the dealer probably would have made about $1,000 profit, and the salesman would have made about a $200 commission. Not that you’ve let yourself be flipped to lease, the dealer could be making up to $15,000 and the salesman could be making a $3,000 commission!
I’m not exaggerating. I get calls weekly from victims of lease flips. Many of the callers are elderly and many of them are widows who never bought a car before but had relied on their husbands. There’s no law that limits the profit that a dealer can make when he sells or leases a car. $10,000, $15,000, and even $20,000 profits are made and usually on leases. The dealers can do this by using the trade-in as a capital cost reduction on the lease but allowing less for the trade than it is worth. In the example above, your trade-in may be worth $15,000 but you were allowed only $5,000 to reduce the capitalized costs of the lease. Also, the dealer could have raised the price of the car you negotiated or the sale price to MSRP or even 110% of MSRP which is allowable by the leasing companies.
By manipulating the number of months of the lease and the down payment [capitalized cost reduction], a dealer can give you as low a payment as you ask for and still make an exorbitant profit. Most buyers are so focused on monthly payments that they don’t carefully analyze what they are agreeing to and signing.
The shorter the number of months of a lease, the greater impact the down payment has on the monthly payment. A $5,000 down payment reduces the monthly payment on a 36-month lease by $139 per month, $208 on a 24 month lease, and $417 on 12 month lease.
Incredibly, many victims of the lease flip, never thought about the fact that after the 12, 24, or 36 month term of the lease, they own nothing. After 36 months, a car with a good resale value should be worth at least half of what you paid for it. Many people who have never leased before believe they can bring their lease car back early if they want. Leasing is not renting, and you can bring your car back early only if you make all of the remaining lease payments. If you had bought the car for $30,000 and financed it for 36 months, you would have about $15,000 in equity at the end of 36 months and no monthly payments. You were building equity with every monthly payment in the purchase, but you were building zero equity with your 36 lease payments.
As I said before, don’t let this frighten you from ever leasing a car. Leasing can be a good choice and sometimes the best choice. You can find six articles I’ve written at www.EarlOnCars.com : “Lease a New Car before You Buy It”, “Car Leasing Booby Traps”, “Be Very Careful When Leasing a Car”, “The Lease Acquisition Fee…the Bank’s Gotcha”, “Buy or Lease Your Car at the Right Time of Year”, and “Should I Buy or Lease My Next Car?”
Monday, January 20, 2020
"PURCHASE OPTION AT END OF LEASE TERM. You have the option to purchase the Vehicle “AS IS” at the scheduled termination of this Lease, provided all sums due under this Lease have been paid by you and you notify us 15 days prior to the scheduled termination of this Lease. The price you pay will be the Residual Value (see Section 10) PLUS a purchase option fee in the amount set forth in Section 23. You will owe any official fees and taxes, documentary fees, tag or title transfer charge or fees, or other amounts charged in connection with the purchase of the Vehicle."
When you lease your new car, the salesman tells you that you have the option to purchase that car at the end of the lease. This option price is the “residual value” which is the estimated WHOLESALE value of the car at the end of the lease. Leasing companies also add a fee to this amount, typically about $350, which they say is to cover their costs of allowing you the option. It’s just more profit to the leasing company like their “lease inception fee” and “lease disposition fee”. But the good news is that this phony fee is disclosed (albeit in the fine print).
What is NOT disclosed is the added profit to the car dealer when you turn in your leased car and purchase it back from the leasing company. All car dealers in Florida (except my dealership) add as much as they want to your contractually guaranteed purchase option price. Dealers will tell you that they are adding their dealer fees, which Florida law allows; But they don’t tell you that Florida law requires this added dealer profit be INCLUDED IN THE ADVERTISED PRICE. The only indication of the price of your purchase option is shown in your lease contract and there is no mention of hidden dealer fees. In Florida, there is no limit to the size of a dealer fee, the number of dealer fees, or what the car dealer chooses to NAME his dealer fees. I know car dealers in Florida that charge more than $2,000 in dealer fees and they will add that to your lease purchase option.
I’m not an attorney, but I do have a Juris Doctor degree (JD) from the “Legal School of Hard Knocks”. I know that car dealers are agents for the leasing companies, especially when the leasing companies are owned by the car’s manufacturer. As an agent for the leasing company, dealers have a responsibility to fulfill the intended terms of the lease contract. I also know that under Common Law, all contracts must be entered in GOOD FAITH. It isn’t good faith to surprise the lessee with a $1,000+ added profit to the car dealer.
My advice to you if you’re anticipating buying your leased car, is to check with other dealers of your make to find out if one might consider waiving their dealer fees. Speak to the “higher ups” in the dealership and the leasing companies. They know what they’re doing is wrong and might waive the dealer fees. As a last resort, consult with a real attorney and ask his opinion. I believe that this practice represents a great opportunity for a class action suit against Florida car dealers and leasing companies. If you’re planning on leasing a car, make it part of the “deal” that, should you desire to exercise your lease option, you will not be charged dealer fees. The dealership will agree to that “in a heart-beat” to lease you a new car.
Tuesday, January 14, 2020
However, it doesn’t work that way with unethical car dealers and uninformed car buyers. It’s always been “caveat emptor”, or “buyer beware when it comes to buying or servicing a car. Unfortunately for a buyer to “beware” he must be “aware”…that is to say educated, mature, sophisticated and experienced. This excludes a very large segment of our population including the very young, the very old, the uneducated, those with low I.Q.’s and those not proficient in the English language. Is this one reason why our regulators and elected politicians don’t seem to care or act with respect to the rampant unfair and deceptive sales practices of a large number of Florida car dealers? Most elected officials and regulators are lawyers and are highly educated and sophisticated. They don’t have a problem buying or servicing a car. In fact, the car dealer that tries to take advantage of a lawyer, regulator, or politician is asking for trouble.
I’ve been writing this column/blog and broadcasting my radio show, Earl Stewart on Cars, for about 17 years. I sometimes feel that I’m “preaching to the choir” when it comes to advising people how to avoid getting ripped off by a car dealer. You, my readers and listeners, largely fall into the category of the educated and sophisticated, “aware” buyer. Most of you aren’t taken advantage of when you buy or service your car because you won’t allow it. Unfortunately, there are enough uneducated, naive, and otherwise vulnerable consumers to feed those unethical car dealers who prey on the defenseless among us. All you must do is read some of the car ads online, direct mail, or the newspapers. To the educated, sophisticated buyer, these ads are actually funny, if you can forget the fact that so many fall prey to them and are taken advantage of by the dealers. For example, it’s hard for you or me to believe that anybody would respond to an advertisement without reading the fine print. Many dealers today are advertising prices that, when you read the fine print, are understated by many thousands of dollars. When you or I see a dealer stating that the car price is plus “freight”, we are educated enough to understand that the law requires that the freight cost be already included in the price. A shrewd buyer knows that “dealer list” is not the same thing as MSRP and that a large discount from “dealer list” means absolutely nothing. We know that the “lowest price guarantee’ is worthless if the dealer reserves the right to buy the car from the other dealer that offers a lower price.
There are those who argue that all buyers have the responsibility to guard against unethical sellers, to take care of themselves. In fact, that’s the literal translation of the Latin legal term “caveat emptor” …let the buyer beware. That’s sounds good, but what about the elderly widow whose husband recently died and who never had to make the decision on a major purchase in her entire life? What about the young person just out of school with no experience in the real world? How about the immigrant who struggles with English? Should we be concerned about our underprivileged classes who often drop out of school because they must go to work to support themselves or their family? You and I know lots of good people who, for one reason or another, simply can’t cope with a slick car salesman.
My bottom line is this, since we can’t rely on our regulators and politicians to protect those who “can be fooled all the time”, maybe we owe it to society to protect these folks. If you know someone who is thinking about buying a car or has a service problem with her car and you feel she may not have the ability to fend for herself with the car dealer, offer your support. If you’re one of the people who needs support, ask someone who can go “toe to toe” with a car dealer to come with you when you are car shopping. By the way, nobody, sophisticated or not, should car shop alone. Two heads are always better than one and it’s always a good idea to have a witness to what was said during a negotiation. And, of course, if you don’t have the time to help a person or you’re that person, you can always call me…I’m always here for you.
Monday, January 06, 2020
Honda was the first auto manufacturer to require their dealers to advertise prices above dealer invoice; in fact, they’ve been requiring this for over thirty years. The industry name for this is Minimum Advertised Price (MAP). This might sound like a good idea if you don’t understand what a car dealer’s invoice truly is and is not. It is NOT the true cost of the vehicle sold to the dealer by the manufacturer. The dealer invoice contains up to several thousands of dollars in profit to the dealer. The manufacturer intentionally hides various sums of money in the dealer invoice that are kicked back to the car dealer at the end of the month, quarter, or year. These amounts go by various names like holdback (typically 2% or 3% of MSRP), advertising, dealer incentives, floorplan interest incentive, and monthly-quarterly-annual incentive bonuses.
Brands with voluntary MAP pricing policies include Subaru, Honda, Acura, Nissan, Infiniti, Toyota, Mazda, and Mercedes-Benz. Interestingly, GM has a MAP pricing policy for its Chevy Performance Parts line, but not its car brands, which are Chevrolet, Buick, Cadillac, and GMC. Historically, for most car dealers, more than half of the vehicles they sell are sold for below invoice. This fact is based on supply and demand. Having a rule that a vehicle must be advertised for more than the average expected markup, simply means that the dealer cannot advertise a competitive price.
When, for many years, Honda was the only manufacturer that required their dealers to advertise higher prices, Honda dealers were the envy of the industry. Dealers of all other makes wished that their manufacturers would invoke the same rule. The reason was that setting a floor on how low advertised prices could be raised their profit margins on Hondas far above the average profit margins on almost all other makes (except luxury cars like Mercedes and BMW).
The manufacturers’ official reason for this rule is to prevent their dealers from advertising prices lower than they will sell the car for. In other words, bait and switch advertising. This sounds like a good and noble reason, but the facts are that bait, and switch advertising exists as prevalently today as it did before the rules for Minimum Advertised Price (MAP) advertised were established. What this rule accomplishes is to decrease price competition between car dealers which has the predictable consequence of increasing the price paid by the consumer.
All the manufacturers have data available to them which compares the advertised prices with the actual transaction prices. They used this data as their reason for MAP; I don’t have access to this data, but I’d bet that there has been no narrowing in the discrepancy between the advertised prices and actual transaction prices since MAP was introduced.
What this all means to you, the car buyer, is that you cannot trust advertising by either the auto manufacturers or dealers. My advice to you is to totally ignore all car dealer and auto manufacturer price advertising. They both are stacking the deck against you in their advertising. The best way to get the lowest price on a new vehicle is by shopping and comparing several dealers’ OUT-THE-DOOR price. An out-the-door price is the price you can write a check for and drive the car home…no hidden fees and no extra charges for dealer installed accessories.
Friday, December 20, 2019
I’m a car dealer and I’ve been in business longer that most of you, since 1968. I began as a Pontiac dealer in West Palm Beach, and I did business back then just about the same way you do business today. I advertised cars for less than I knew I could, or would, sell them for. I added hidden fees to the prices I quoted my customers. I added overpriced accessories to my cars like undercoating and paint sealant. I negotiated the highest prices I could with those least capable of understanding how to get the best price. I even rewarded my salesmen when they made a profit of $4,000 or more on some unsuspecting, defenseless customer…a $500 bonus in addition to a $1,000 commission and his name on our revered SLAM DUNK BOARD. Bear in mind that I would also sell cars to smart, sophisticated negotiators for $100 profit of even less. This way of selling cars is unfair, immoral, and unethical. It took me a long time to figure this out.
When the Internet and World Wide Web became a reality in 1990, who could have guessed that it would change the world more than any invention in the past. What has transpired from this spark at the end of the 20th century, is the KNOWLEDGE EXPL0SION of the 21st century. With Big Data, Artificial Intelligence, and Quantum Computing giving us tools like Google, Apple, Facebook, Amazon and Netflix, the sum-total of human knowledge is doubling in less than every 12 hours. I was born in 1940 when human knowledge was estimated to be doubling every 12 years. The bottom line is that everybody is getting a lot smarter, especially the consumer. If car dealers want to survive, you must begin dealing intelligently with their customers. Before you know it, you won’t have any more customers you can deceive into buying cars they don’t want and paying higher prices than they should.
1. Display your lowest price on every new and used vehicle you sell.
2. Add no hidden, bogus fees to your quoted or advertised price.
3. Never pre-install dealer accessories to your vehicles, especially if they’re not included in the advertised or quoted price.
4. Don’t deprive your prospective customers of their American, inalienable right to shop and compare your lowest price with the competition. Capitalism, competition, and the free market place are American attributes which make our country the greatest on the Planet.
5. Do not switch a customer that wants to buy a car to leasing because you can make a lot more money leasing. If leasing is the best alternative for your customer, your profit should be equal on the buy or the lease.
6. If your customer wants to finance his car with you, offer him a fair, competitive interest rate. Offer to sell him “products” like extended warranties, maintenance contracts, GAP insurance, road hazard insurance, and emergency road service only with thorough disclosure of real cost and benefits. Never add anything to the finance contract that the customer does not know about or understand. Never say or imply that the lender requires that he buy an extended warranty or any other product.
7. Never sell a used vehicle with an unfixed dangerous recall. Most car dealers are doing this today, wantonly, and in most cases not even disclosing the recall. Some of these recalls have no fix available.
8. Never display conditions that increase the real price of the advertised vehicle in the unreadable fine print of your advertisements. All car dealers do this and so do their manufacturers. Where is the honesty and transparency in advertising a new car that you can supposedly lease for $299 per month when the unreadable fine print requires a $5,000 down payment?
9. Don’t falsely give hope to prospective customers with bad credit by understating the conditions that they must meet to obtain financing. For example: “ANY CREDIT APPLICATION ACCEPTED” or “WE FINANCE GOOD PEOPLE WITH BAD CREDIT”.
10. Don’t trick customers into believing that you will pay off all the money owed on their current purchased or leased car and sell or lease them a new one…” WE’LL PAY OFF THE MONEY YOU OWE ON YOUR PRESENT CAR, NO MATTER HOW MUCH IT IS”. More and more car drivers owe more on their cars than they’re worth…often many thousands of dollars. You’re tricking them into thinking you are paying off their old loans, when the truth is, you’re adding what you paid the bank to the price of the new car you sell or lease them.