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Saturday, January 20, 2007

IS A CAR DEALER CRAZY IF HE RECOMMENDS THAT YOU BUY A CAR FROM HIS COMPETITOR?

Well, I guess I’m “nuts” because I am recommending that you consider CarMax the next time you are in the market for a used car. In case you haven’t heard of CarMax, they are the largest seller of used cars in the USA. Unfortunately for readers of the Hometown News, the nearest location is in Boynton Beach, just off I-95, but it might be well worth your drive. CarMax is a publicly owned company that was spun off a few years ago from Circuit City. They are extremely profitable and if you had bought stock in CarMax one year ago, you would have more than doubled your money.

The reason they are so profitable is that they offer the buyer of a used car something that most other used car sellers can’t…a fear-free buying experience. There is only one thing scarier than buying a new car and that is buying a used car. At CarMax you can buy a used car with trust and confidence. For one thing, they offer a 5-day money back guarantee, with the only condition being that you return the car in the same condition it was when you purchased it. The cars that CarMax sells are carefully checked over and thoroughly reconditioned. They wholesale the cars that don’t meet their standards. At CarMax you aren’t dealing with traditional “used car salesmen”. They hire quality individuals from outside the retail car business and train them in the CarMax way of doing business. The price you see on the window and the price you are quoted is “almost” an out-the-door price. Unfortunately, they do add a $149 “dealer fee” which they call a “processing fee”. This is the only thing that CarMax does that I don’t like. However, compared to virtually every other Florida dealer, their “dealer fee is low”.

Another thing they do which I think is really great is buy your old car from you whether you buy a car from them or not. They don’t play games by over-pricing their used cars so that they can pretend to be giving you more for your trade-in then they really are. They do not discount their cars from their posted prices. You can compare their prices with other dealers knowing that the CarMax price you were quoted is their best price (plus $149). My experience with CarMax has been that they pay fair wholesale prices for used cars. My dealership will sometimes sell a non-Toyota trade-in to CarMax because they can appraise it for more money than we can. Sometimes we suggest that our prospective customers drive their trade-in to CarMax and get a price bid, if they feel we cannot offer them a high enough trade-in allowance.

One of the reasons that I know so much about CarMax is that I hired away one of their best managers several months ago. He worked for CarMax in South Florida for 9 years and I was able to persuade him to come to work for my dealership by telling him that we wanted to be as good as CarMax and one day even better. His name is Jeff Dallin and he is now my used Car Manager. We have implemented many of the CarMax ways and even improved on some of them. For example, we over a seven day unconditional money back guarantee on every used car we sell and we do not charge any dealer fee. We also survey all of our used car buyers to measure the level of customer satisfaction for our whole department and each individual salesman. We copied CarMax’s “Above and Beyond” award which is given to employees who do something extra special for a customer.

I’m not ashamed of the fact that I am copying a competitor who has done something better than I can. In fact, this is exactly how Toyota became the best auto manufacturer in the world. Some of you are old enough to remember the first car that Toyota sold in the USA in 1958. It was called the “Toyopet”. I won’t mince words…it was a piece of junk. But Toyota sent engineers to observe the way GM, Ford, and Chrysler manufactured cars, adopted their best practices, and improved on many of them. Today Toyota builds the highest quality cars on the Planet.

WHEN IS A CAR SALE NOT A SALE?

A common definition of the word sale is “an occasion (usually brief) for buying at specially reduced prices”. The problem with many sales advertised by car dealers and other retailers is that they are virtually always advertising a sale, which violates the part of the definition of a sale that it is brief. Also, the price they advertise is not “specially reduced”, but the same price you can always buy that car for.

It is very hard to tell a legitimate sale from one that’s not. One suggestion is to be somewhat skeptical if a dealership is constantly advertising sales and specials. If you are always having a sale, then by definition it is not a sale. Wal-Mart addresses this in a very upfront manner. They advertise that their prices are low every day and that’s exactly how they mark their merchandise. Wal-Mart doesn’t try to trick you into coming in on a certain day or weekend because, if you don’t, you won’t get the lowest price.

There is an axiom of advertising that says you must always have a “cause for action” built into your ads. When you say all the good things about your products and prices, you don’t have a good ad unless the reader has a specific reason to come into your store immediately or within a short time. The reason for this is pretty obvious. Most people are procrastinators. I am. That’s why I am typing this column at 4:26 PM on Friday and my deadline is 5:00 PM. That’s what sales are all about. Make the prospective buyer think that if he doesn’t come in by Sunday at 6:00 PM, the prices will go back up again on Monday. Unfortunately, that is rarely the truth. You can almost always buy that car on Monday for just as good a price.

As you know, buying a car is often a negotiation between the buyer and the seller for the highest trade allowance for the trade-in and the lowest price or monthly payment on the new car. A car dealer will sell you a used or new car at his lowest price, if you are a good negotiator, 7 days a week in almost every case. One of the few exceptions to that is when the manufacturer puts on an incentive for a short time because this effectively lowers the price to the dealer. He is likely to pass along some or that entire price cut to you. Another exception is when a dealer inadvertently stocks too many vehicles of one or more models. This isn’t something that would likely happen very often or certainly not all the time. Many dealers always advertise that they have too many cars in stock. If I owned a dealership that always had too many cars, I think I would consider replacing the man who ordered my cars.

If a sale is legitimate, it should be a relatively rare occasion and there should be an honest, understandable motivation for that car dealer to take a much lower profit on those particular cars. Of course the acid test is to shop the sale price with that dealer’s competitors. I find that dealers usually will quote their lowest price on the Internet and this is a great place to determine the validity of the “sale” price. Be careful when checking prices on the Internet and the newspaper because most dealers charge a “dealer fee/doc fee/dealer prep” on top of the selling price. This price ranges from around $500 up to $1,000. Florida law requires that dealer fees be included in advertised prices, but this law is regularly broken in the newspaper and Internet ads.

Another thing that you should be careful of is to find out how many of the type of cars that you might be interested in are on “sale”. The trick here is to advertise a car at a huge discount but there are only one or two cars available at that price. The chances of you buying one of them are slim and none. They may say, “Many others available at similar savings”, but the trick here is to know what the definition of “similar” is. Scientists say Humans are very similar to Chimpanzees. The other trick on switching you to another car at “similar” savings is that a dealer can now legally add his dealer fee/doc fee to the 2nd car because it was not advertised.

I must apologize to you for a stupid error I made in my column which ran in this paper on Friday December 29, “Should I Pay Cash or Finance My Car?” In the 3rd paragraph there is a sentence, “If you have a 3 year CD paying you 6%, on $25,000, you will earn $9,929.99 at the end of 3 years.” The actual interest earned on a 6% $25,000 CD for 3 years is only $4775.40. This big, dumb mistake did not change the point I was trying to make, but it sure made me feel silly. I sincerely apologize and I will try to be a lot more careful to check my arithmetic in the future.

Saturday, January 06, 2007

SHOULD I BUY MY CAR AT THE END OF THE LEASE?

The best thing about making this decision is that you are holding the best hand in the card game between you, the leasing company, and the dealer. That is because you know your car better then they do. You probably have been driving it for close to three years, you know how well you have maintained it, how worn the tires are, whether or not its been wrecked and repaired, and how many dings, dents, or upholstery blemishes there are. You know if it was garaged and how you carefully you drove it. You also know, better than anybody, how well it runs. All of these things determine the value of your car.

Unless you buy a new car, you can not have as much confidence in any other used car that you may buy than your own used lease car. The only assurance that you have when you buy somebody else’s used car is their word or the dealer’s word about how it was driven and maintained. That mean that if you did take very good care of your lease car, drove it carefully, kept it in a garage, waxed and washed faithfully, and maintained it carefully it is worth more to you than anybody else because you are the only one who knows that. And you can never be sure about that for any other used car you might buy.

Given that you like your lease car and want to keep it, the next step is determine its wholesale market value. The leasing company usually is not in the business of selling cars, just leasing them. Getting rid of off-lease cars is expensive and time consuming for them. You have an advantage here too and you should be able to negotiate a good price. Remember, you know your car much better than they do. They will usually give you a price you can buy the car for without even looking at it. Oftentimes they will call you first about buying your lease car before the lease is up. Be careful when this happens because this can mean that they are facing a loss if they have to wholesale your car at the auction. They are calling you to sell you your car for more money than they can get for it at the auction.

That is why you need to establish the current wholesale market value for your car. Car dealers call this ACV, for actual cash value. Check the Internet for information on the value of your car. www.kbb.com, the Web site for Kelly Blue Book is one of the best sources. Consumer Reports can also give you this information. The best check on the wholesale value is to actually drive your car to 3 or 4 car dealerships that are franchised for your make. If you drive a Ford, visit as many Ford dealerships as you can and tell them you want to sell your car. You aren’t misleading them because it’s a lease car. You could exercise your option to buy it from the leasing company and them resell it to the dealer, if the dealer’s offer was higher. If you live near a CarMax store, the largest retailer of used cars anywhere, they buy a lot of used cars over the curb and their prices are usually very competitive.

Now that you are armed with the true market value for your car, you can negotiate the best price with the leasing company. Even if they won’t sell you the car for the ACV, wholesale value, paying as much as $2,000 over wholesale for a car you have absolute confidence in is a good deal. If you can buy it for wholesale or below, you should celebrate!

Another thing to be on the lookout for with the leasing company is when they offer to extend your lease for the same monthly payment you are currently making. That is not a good deal. They are doing this because they will lose money if they sell this car at the auction at the present time. They want you to keep making payments on the car so that their depreciation rate catches up with the residual value. The residual value is the price they guessed your car would be worth in 3 years. If you had leased the car for longer at the onset of your lease, the payments would be lower than they are now. Why should you pay the leasing company the same as they charged you for a shorter lease?