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Monday, July 27, 2009

Your Clunker’s Salvage Value Should Reduce the New Car Price

The CARS government program which pays you up $4,500 for your old gas-guzzler, clunker is up and running. In fact, it’s exceeding my expectations for effectiveness. My first thought when I heard about this program was that most owners of older, cheap cars would not have the credit to buy new one, even with a $3,500 or $4,500 gift from Uncle Sam. I was wrong. A lot of people with good credit are trading in these old cars and this will result in a real short term boost for car sales nationwide. It’s entirely possible that the program could run out of money before the November 1 deadline. The funding for the program is $1 billion. This sounds like a lot, but will fund only about 250,000 new car sales which is an average week’s sales.

For all of the information on the program, you can click on http://www.cars.gov/. Unfortunately, as is the case with most government programs there is “too much” information. The rules comprise 136 pages and are quite confusing and ambiguous.

The purpose of this column is to point out one of the least understood but most important elements of the program. That is what is the true “salvage value” of your clunker trade-in. You are at the mercy of the dealer to learn about this unless you want to shop your clunker to the list of government approved salvage companies. The dealer is permitted to keep $50 of the salvage value of the trade and the rest is to be given to the consumer. With a typical salvage value of $200, the dealer retains $50 and $150 is added to the $3,500 or $4,500 you qualify for.

However that small amount assumes that the car will be crushed and sold only for scrap metal value. A lot of clunkers have valuable parts and accessories that can be disassembled and sold individually. These can total thousands of dollars...a CD player, tires, camper top, air-conditioning compressor or condenser, an alternator, etc. The only way to truly maximize the true value of your clunker is to competitively shop it with several approved salvage dealers. The dealer you buy your new car from should do this for you. In my dealership, we get bids from 5 different government approved salvage dealers and, of course, take the highest bid.

The dealer you are buying from is required by law to disclose the amount of money he is receiving from the salvage dealer. You should sign a form with this information on it and receive a copy signed by the dealer. This is your money and should be taken off the price of the new car you are buying.

This salvage value could make a big difference in the final price you pay for your new car. When you are shopping for your new car, you need to compare not only the price of the new car, but the salvage amount each dealer is allowing you. If he discloses that he is allowing you only $150, that means that you are receiving only the scrap metal value of your car. If you tires are in good shape, these alone should be worth more than $150. You should ask the dealer to identify the salvage company he is selling your clunker to. You should also ask to see what the other bids were from other salvage dealers. If a dealer is getting only one bid from one salvage dealer I would be very suspicious.

One of the reasons that it took the government so long to get all of the rules of the CARS program out was the realization that there is a huge opportunity for fraud in the sale of the clunker. In my opinion, this opportunity still exists. What’s to prevent a car dealer from disclosing a lower amount than the scrap dealer actually pays him? The scrap dealer can pay the dealer one amount by check and the other in cash “under the table”. Using multiple scrap dealers with multiple bids would go a long way to reduce this threat, but, unfortunately, this is not a requirement of the CARS program.

Monday, July 20, 2009

Cash for Clunkers: BUYERS BEWARE

If all goes according to plan, the CARS government stimulus program, “Car Allowance Rebate System”, aka “Cash for Clunkers” will goes into effect this Friday, July 24th. I’m predicting that this government program will be exploited by car dealers and that car buyers will be taken advantage of on a scale rarely seen.

These are the basic requirements to determine if your car qualifies:
Your trade-in vehicle must:

§ have been manufactured less than 25 years before the date you trade it in
§ have a "new" combined city/highway fuel economy of 18 miles per gallon or less
§ be in drivable condition
§ be continuously insured and registered to the same owner for the full year preceding the trade-in
§ The trade-in vehicle must have been manufactured not earlier than 25 years before the date of trade in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001

Note that work trucks (i.e., very large pickup trucks and cargo vans) have different requirements.

Here are some tips to avoid being one of the victims:

(1) Do not pay any attention to car dealers’ advertising on this program. Most of it is entirely misleading and deceptive. Go to the official government Web site, www.CARS.gov and read the real story. Beware of fake Web sites which purport to be the official government Web site.

(2) If you own a car that qualifies for the rebate, be sure that it’s not worth more than the government voucher. Before you consider excepting a check for $3,500 or $4,500 for your old car, be sure that it’s not worth even more. An older, cheaper car that will run is in higher demand today than ever before. In today’s terrible economic times, many people cannot get credit to buy a new car or nicer used car. Therefore they have to buy older, cheaper ones for cash. This high demand and low supply has raised the prices for “clunkers”. Get at least three bids for your old car from the used car managers at the dealerships that sell your make of car. If you live near a CarMax, they also pay top dollar for used cars. Although this is more trouble and time consuming, you may want to consider selling your old car to a friend, neighbor or listing it on Ebay.

(3) Be sure that the dealership you are trading in your clunker to, is registered with the Government. Registered letters were sent out last Friday, July 17, to tell dealers how to register. These dealers will be listed on www.CARS.gov. You can check this Web site to see if your car qualifies for getting bad enough gas mileage www.fueleconomy.gov/feg/sbs.htm.

(4) Verify that the $3,500 or $4,500 credit you are getting for your clunker is coming from the government and not from the dealer. A dealer could find that your car is worth more than the amount he can get from the government program. Or, the dealer may not really be registered for the program. Demand official verification that the government voucher for the VIN number for your car has been issued to this dealer.

(5) Buy the new car before you tell them you have an eligible clunker. You probably have heard the consumer tip, “don’t tell the dealer that you have a trade-in until you have negotiated the best price for the new car”. That tactic is even more important with the CARS program. The dealer sees your clunker as $3,500 or $4,500 in extra profit for him. Don’t let him see that extra profit but make it your extra savings on the best new car price you can negotiate. Remember to get at least three competitive bids on that new car. When you have selected the dealer with the best price, “spring” your clunker worth $3,500 or $4,500 on him and take that right off low price you already have locked in.

(6) Remember that this program does not apply to buying a used car. Although I believe it should, the car you are buying must never have been titled. If the dealer tells you otherwise, he is not using the CARS program and is tying to trick you into thinking you are participating.

(7) Why your clunker could be worth a lot more than $3,500 or $4,500. If sold separately, the parts in a car costing $3,000 can be worth more than $10,000 and more. Cars that are totaled are sold at auction to junk dealers who dismantle the car and sell the useable parts one at a time. Cars that can’t be sold in this country because of emissions or safety considerations can be exported to South or Central America where they have much looser regulations. It’s common in South Florida for cars with very high mileage to be exported because in other countries they have no rules against rolling back odometers or they aren’t enforced. Our government can’t track the VIN of a car sold out of the county. I predict that some dealers participating in the CARS program will be taking cash kick-backs from exporters and junk dealers; or setting up companies in different names to handle these kinds of transactions.

Monday, July 13, 2009

LEASE A NEW CAR BEFORE YOU BUY IT

I wrote another column that was entitled, “Buy a New Car before You Lease It”. The main message in that column was to establish the lowest “capitalized cost” which is critical in determining your lowest lease payment. Almost every lease ad I read establishes the capitalized cost at MSRP. My column explains that you should shop and compare prices as if you are going to buy the car. Once you’ve determined the lowest price, you can then ensure the dealer you are leasing from uses that lowest for your capitalized cost on the lease and not full sticker or MSRP.

The reciprocal of this rule is also true. The purchase price of your new car is only one component in the total cost of ownership. Depreciation is the largest single cost of owning. Two different make/model cars can have almost identical prices, but one can easily depreciate thousands of dollars more than the other. For example, in the current Automotive Leasing Guide, the residual value for a Honda Accord sedan on a 36 months lease is 52% and the residual value for a Chrysler Sebring sedan is 25%. The MSRP of these two cars is $22,400 for the Honda Accord and $21,900 for the Chrysler Sebring. The Sebring depreciates $16,245 in 3 years! The Accord depreciates only $10,752. Even if you were able to buy the Sebring for a much larger discount than the Accord, the discount would not offset the extra depreciation.

The Automotive Lease Guide, ALG, is the “bible” that virtually all leasing companies use to establish the used car value of the car they lease you at the end of the lease. All car dealerships, leasing companies, and banks that lease cars will have a copy of this book. You can get information from ALG’s Web site, www.ALG.com and you can also get information on residuals and depreciation from www.KLB.com and www.Edmunds.com.

ALG has been doing this for more than 40 years and they look at many factors before they establish a residual number for a particular year, make, and model vehicle. For example, the residuals for Chrysler and GM products plummeted when these companies entered bankruptcy. The residuals for these makes came back, although not all the way, after they emerged from bankruptcy. Higher priced cars typically have higher markups and as a general rule, depreciate faster [have lower residuals] than low priced cars. Cars with high sticker prices can have a markup of 25% and a low sticker priced car can have a markup of 8% or 9%. Vehicles that you typically see large discounts and cash rebates on, most recently Chrysler and GM, are usually the ones that depreciate the fastest.

The biggest single factor that translates into a higher residual [low depreciation] is high quality. Historically, Asian vehicles have typically ranked highest in quality surveys. My favorite judge of vehicle quality is Consumer Reports and in their tests for reliability there was only one American nameplate in the top 10, the Chevrolet Corvette ZO6 manual.

Another important factor in establishing depreciation rates is the price of gasoline. The residual values of trucks, vans, and SUV’s plummeted over a year ago when the price of gas hit $4 a gallon. As you might expect, the residual values of fuel efficient cars, especially hybrids, soared. With gas prices being volatile, you may want to consider leasing if you want to “lock in” the depreciation. You can hedge the price of gasoline and let the leasing company bear the risk or reward. At the end of the lease on a big truck if gas prices go back to $4.00 or higher, the resale value will plummet but you can simply walk away from the lease vehicle and let the leasing company absorb the loss. On the other hand, it the price of gas drops precipitously, the resale/residual will rise. You can then exercise your purchase option and “flip it” to the dealer who will pay you the higher wholesale value.

The bottom line is that, if you are going to buy your next car, don’t make a final decision until you know what the ALG residual value for that specific year, make, and model is. The higher the value, the less is the cost of depreciation which translates into a higher trade-in allowance when you go to buy your next vehicle. Or, it translates into being able to sell it outright for more money.

Monday, July 06, 2009

Always get an “Out the Door” Price

Many states have laws prohibiting car dealers from adding “fees” onto the prices they quote you. Unfortunately, Florida is not one of these states. The state law in Florida requires only that the dealers disclose on the buyers’ order that this additional charge is not a local, state, or federal fee, but is actually just profit to the dealer.

Almost every car dealership in Florida has this extra profit printed on their buyer’s order, under an assortment of labels like “Dealer Fee”, “Doc Fee”, and Dealer Prep”. You will not see it on the car’s price sticker you will probably not hear any verbal disclosure by the sales person or manager, unless you ask. If you ask, you will be told that “all other dealers charge this” and this is “almost” true.

Florida law also requires that when a dealer has this additional profit printed on his buyer’s order, he must not delete it for some customers and charge it to others. The only way he can effectively eliminate this extra profit is by reducing the quoted selling price of the car by this amount, but keep the dealer fee amount that is printed on the buyer’s order. This is rarely done because dealers do not pay their salesmen or managers a commission on the dealer fee. If you demand the price be reduced to compensate for the dealer fee, it cuts the salesman’s commission. Dealer fees range from $500 to $900 and a typical salesman’s commission is 25%, costing the salesman $125 to $225.

Florida law requires that a dealer include the dealer fee in the price of an advertised car. This is often ignored by dealers advertising on the Internet and in direct mail because it is below the “radar screen” of the Attorney General’s office. In newspaper, TV, and radio ads one car is advertised at a low price with a seemingly innocuous designation like “#1234B” (the stock # of the car) all there is to tell the buyer that only one car is available at this price. Another common tactic is a fine print disclosure at the bottom of the ad reading “price good on date of publication only”. The odds of being able to buy one of these cars at the advertised price are not good. Not only is there only one car with the price good for just one day, but the salesman receives no commission or a much smaller commission if he sells you this car.

My advice is not to pay much attention to advertised car prices. Do your shopping on the Internet or by telephone. Insist on an “out the door” price including everything except sales tax and license tag. If buying a new car, get several “out the door” prices quoted on the exact same year, make, model, and accessorized car. Two very good free Web sites to get information on dealer costs and fair retail prices are www.kbb.com and www.edmunds.com. Consumer Reports is also an excellent source of product information and pricing information, but there is a fee for their Web site.