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Monday, July 28, 2008

Never Go Car Shopping Alone

This is an update to a column that originally ran about a year and a half ago, December 8, 2006. I’m continuing to get daily phone calls from car buyers who mostly have “already bought a car”. The “horse is already out of the barn” and they want me to give them advice on how to get it back. The vast majority of these car buyers went car shopping and bought their car alone. The majority of the complaints have to do with verbal promises by the sales person, not committed to writing. Bringing at least one other person when you are car shopping doesn’t negate the importance of getting all promises in writing, but substantially lowers the chances of a car salesman trying to pull a fast one. The salesman and his manager know that, in court, two people’s word trumps that of one.

A woman wrote me a letter this week in response to one of my columns. Her husband had recently passed away and this was the first car she had bought on her own. The dealer did not have the model car with the accessories she wanted and was unable to locate one at another dealership. She did not want to make a decision 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 actually 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 others 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 has to 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 more often than not, 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.

Saturday, July 19, 2008

WHAT YOU NEED TO KNOW ABOUT GAS GUZZLERS

Our country is experiencing a watershed moment in its history. The cost of gasoline has finally reached a threshold of economic pain causing the American driver to begin evolving from her love affair with the SUV, pickup truck, and van into smaller gas efficient cars and hybrids.

But, there are still a huge number of these gas guzzlers on the roads, in dealers’ inventories, and parked in driveways and garages. What will become of these behemoths? You can be sure of one thing, they won’t just disappear overnight. Eventually they will be sold and, of course, that means somebody will buy them. Because of the rapidity with which gas prices rose recently, the demand for gas guzzlers evaporated virtually overnight. CarMax, the largest seller of used cars in the world, said that the value of SUV’s, pickups, and vans dropped more in the last 3 months than they would normally drop in a year.

In my opinion, the values have plummeted even more that this. CarMax judges wholesale values of vehicles based on those that are bought and sold at wholesale auctions. There are hundreds of thousands of gas guzzlers sitting on car dealers’ lots which, under normal conditions, would be going to the auctions for sale, but are not. Why? Because car dealers are in a state of denial. Imagine being a used car manager whose total compensation is a percentage of the profit he produces on his retail and wholesale profits every month. Three months ago his inventory of 100 vehicles was worth two million dollars. Suddenly it’s worth 1.6 million dollars…a loss of $400,000. But right now that’s only a “paper loss” and that used car manager, general manager, and dealer only realize the loss if they take these vehicles to the auction and sell them to the highest bidder. If they keep them on the used car lot they can “pretend they’re worth more” or “hope” that the value of gas guzzlers will rise. By not taking the true loss, their paychecks and the company’s financial statement aren’t affected.

What does all this mean for you? If you are one who actually needs an SUV, pickup, or van, [for your business, tow your boat, accomodate a large family] it’s not a good time to buy a used one from a dealer. The dealers’ cost on gas guzzlers on his lot is vastly inflated because of the dealers’ refusal to accept reality. The dealers’ retail prices of gas guzzlers are based on a markup from an inflated cost which leads to an inflated retail price. This is similar to what has happened in Florida, California, and Arizona with housing prices. Sellers are in denial about how far the value of their homes have dropped and are just sitting on unrealistically high prices, praying for a miracle. This means that home sales have virtually stopped in these states. Gas guzzlers will begin to sell at a normal pace when their prices finally come down to the market value. That is the time to buy a gas guzzler if you need one. When this time will arrive is hard to predict, but it will happen a lot faster than it’s happening with housing. I’m sure that you will have some great buying opportunities for used gas guzzlers by the end of this year. Unfortunately some of those opportunities will be the result of banks being forced to liquidate bankrupt dealers’ used car inventories.

Be very dubious of offers on the radio, TV, or the newspaper for gas guzzlers that seem “too good to be true”. There are a huge number of cheap gas offers tied to the sale of gas guzzlers. Chrysler Corp. is offering $2.99 gas for three years, but read the fine print. The mileage is limited as are the models it applies to, and the actual dollar value of the offer is less than the rebates that Chrysler is also offering. You must choose only one…the rebates or the gas card. People are better off to take the rebates and pass on the $2.99 gas card. Chrysler knows this and is using the gas card just to “get you in the door”. Dealers are advertising even greater “free or cheap gas scams”. One local dealer is offering $500 worth of free gas just for a demonstration ride. The fine print says, “while supplies last” and only one $500 in gas will be given away every 90 days”. Another local dealer is advertising gas for 99 cents per gallon. The fine print says this is just for 6 months and to accept this offer you waive all discounts and rebates. Just remember there is no such thing as a free lunch.

Another trick that dealers are using to lure you in to trade in your gas guzzler on a new vehicle is a high fake trade-in allowance for gas guzzlers. They accomplish this by marking up their new vehicles thousands of dollars over MSRP, so that they can show you a bogus high trade-in allowance for your gas guzzler. In the fine print you will find that the discount is from “Dealer List Price”, not the manufacturer’s. You may have also seen the advertised very high “minimum trade-in allowance”…$3,500 or even $5,000. If you have to sell your gas guzzler now, you are better off to seek a private buyer or sell it on Ebay.

If you must have a gas guzzler from a dealer today, it’s safer to buy a new one than a used. The reason for this is that the manufacturers have been more realistic in dropping the prices of new gas guzzlers than dealers have dropping the prices of used. Furthermore, I highly recommend that you lease a gas guzzler rather than buy one. This is because the banks and leasing companies have been slow to adjust the residual values in their leases down. This means a lower lease payment for you. Also, who knows how much further gas guzzlers will decline in value. Suppose, God forbid, we see $8.00 a gallon gas? I you own a gas guzzler, you are stuck with the lower value. If you lease it, you can walk away from it and leave the bank to take the loss.

Monday, July 07, 2008

BAIT & SWITCH ADVERTISING

(READ THE FINE PRINT)

All car dealers pay the manufacturers the same prices for their new cars. Dealers will lead you to believe that volume dealers pay less, but this is not true. So, when a car dealer advertises a price for a new car in the newspaper, he has no price advantage over his competition.

Virtually all of the prices for new cars you see advertised in the newspaper are so low that it would be impossible for a dealer to remain in business if he sold more than a very few cars at that price. The reason for this is that, if a dealer advertised realistic prices with a reasonable profit built in, another dealer would advertise a lower price. The dealer who advertised a realistic price is actually helping his competitor sell a car.

Most of the new car prices advertised in the newspaper are below the dealers actual cost. He protects himself by selling very few at this price and counting this loss as a cost of advertising. Next to an advertised car you will see some letters and numbers like, #5632A. That is the “stock number” of the car being advertised. This is all that the dealer does to tell you he has just one at this price. The chances are that if you are not the first person in the dealership on the morning of the ad, this car will be gone.

Look for these two fine print disclosures at the bottom of the ad: (1) Price good on date of publication only. (2) Price good with copy of this ad only. These are just two more ways the dealer can avoid selling you the car at the advertised price.

If you read my last column, you understand about “dealer fees”. These fees are additional dealer profits ranging from $500 to almost $1,000 that are added to the agreed upon price of the car by most dealers in Florida. Florida law requires that this dealer fee be included in the advertised price. When the salesman tells you the advertised car has been sold but he has another one “exactly like it”, he can legally add back on that dealer fee.

As you can guess, the salesman’s commission on an advertised car is either zero or very small. Having a very small incentive to sell an advertised car, he will most likely encourage you to buy any other car.

My recommendation to you is to ignore advertised new car prices. If you must respond to an ad car, call the dealership first and ask if the car is still available. If the answer is no, you have saved yourself a lot of time and aggravation. If the answer is yes, ask if they will hold the car for you. If you have to, offer to give them your credit card for a deposit to hold the car. If they won’t hold the car, save yourself the wasted trip.

The only way to get the best price on a new car is by getting competitive bids from at least 3 car dealers for the exact same year, make, model, and accessorized car with the identical MSRP. You can do this on the Internet, by phone, or in person. Use Consumer Reports magazine, the Internet (www.edmunds.com and www.kbb.com are two excellent free sources of information), or even your local library.