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Monday, July 26, 2010

NEGOTIATING TO BUY A CAR

Buying a new or used car is one of the last bastions of the negotiated price. In some countries, negotiation is fairly commonplace in retail stores, but in America virtually all products are sold at a fixed price. Some of us are simply not comfortable negotiating and most of us are not very good at it.

As I have said in previous columns, the best way to buy a new or used car in on the Internet. You can do your research on which car is the best to suit your needs, get guidance on what kind of price you can expect to pay, and finally get quotes from several dealerships on that specific car. However, everybody is not “Internet savvy” and if you are not, you may find it necessary to walk into a car dealership and negotiate for the lowest price.

If you are not comfortable with negotiation, the best advice I can give you is to bring someone along with you who is. Car sales people and sales managers are trained experts in negotiation. This is how they make their living. Here are some tips for you if you decide that you want to negotiate the best price on a car.

(1) If you have a trade-in, keep that separate from the negotiation. Negotiate the best price on the car you are buying and then negotiate the best price you can get for your trade-in. Don’t fall for the old “over allowance” on your trade-in ruse. This is where the dealer makes up the price of car you are buying higher so that he can make you think you are getting more for your trade-in.

(2) Never buy a car on payments alone. Always negotiate the best price you can for the car you are buying and then calculate your best payment when you have negotiated for the best interest rate.

(3) Be sure you understand how the dealer arrived at his retail price. Federal law dictates that a Monroney label be affixed to every vehicle with a manufacturer’s suggested retail price. Many dealers mark that up with another label, often referred to as a “Market Adjustment Addendum”. This markup can be several thousands of dollars.

(4) Expect the first price you are given to be substantially higher than what you can buy the car for. Sales people and sales managers are trained to “start high because you can always come down”. Don’t be afraid to offer substantially less than the initial asking price. You should look at just like the car salesman does, but the reverse…”start low because you can always go higher”. If the salesman excepts your first offer, you probably offered too much. In fact, shrewd car sales people are trained to always ask for more money, even if the offer is good one. This is because they don’t want to “scare off the customer” by telegraphing to the customer that he “left some money on the table”.

(5) If the sales person asks you for a deposit before he will begin negotiating, determine whether the deposit is refundable. Florida law requires a nonrefundable deposit be disclosed in writing on the receipt. If this is printed on your receipt, insist that this be waived in writing on your buyer’s order. If the dealer will not agree to this, be warned that he may be able to keep your deposit if you change your mind about buying the car.

(6) Be prepared for a lot of “back and forth” when the salesman takes your offer back to the manager. When you get close to finding a mutually acceptable price, the manager himself will often come to talk to you. Don’t be intimidated stick to your guns even when they tell you this is “positively, absolutely the lowest price”. Even if you think you do have the lowest price, a great strategy is to get up, walk out of the showroom, and get into your car to drive away. This will often precipitate an even better price. When you try this, the worst case scenario is that you really do drive home, but you can always return and buy the car the next day for the last price they quoted you. They may tell you that you have to buy today, but nine times out of ten that is a bluff. The only exception is when there are factory rebates and incentive expiring.

(7) The last day of the month really is a good time to buy a car. The salesman’s bonus money is maximized, the factory incentives are in effect, the managers are desperate to make their quotas, and it is the one time of the month when the buyer has the best edge in negotiation.

Caveat emptor “let the buyer beware” could have been written specifically for what you can expect when you walk into a car dealership to negotiate the best price. You are up against experts who negotiate for living. But, if you will follow my advice above, you should be able to hold your own and maybe even get a great deal.

Tuesday, July 20, 2010

Government Mandated Closing of Dealerships

As you probably already know, our government “strongly encouraged” General Motors and Chrysler Corp. to close over 2,000 car dealerships nationwide. South Florida was severely impacted by this as lots of Chrysler, Jeep, Dodge, Saturn, Pontiac, Hummer, Saab, and other GM and Chrysler stores were shut down or told they must by the end of this year.

Last Sunday, a report was released by the Special Inspector of the Troubled Asset Relief Program (TARP), Neil Barofsky, that said “tens of thousands of jobs were lost” as a result of closing over two thousand car dealerships. The report said, “It is not at all clear that the greatly accelerated pace of the dealership closings during one of the most severe economic downturns in our nation’s history was either necessary for the sake of the companies’ (GM and Chrysler) economic survival or prudent for the sake of the nation’s economic recovery”.

Now, my first question is why was it necessary for our government to conduct a study on whether or not closing over two thousand businesses nationwide would result in greater unemployment? My dealership employees 134 people and there are a lot of satellite businesses that rely on my business like parts suppliers, printing companies, janitorial services, etc. If I closed my dealership it would result in more than 134 people being unemployed. If you multiply that by 2,000 it results in at least 268,000 men and women without jobs. I wouldn’t have to conduct a study after I closed my car dealership to tell me what was going to happen to my employees.

Even now, the consequence of this mandate to close down 2,000+ car dealerships is not obvious to our government. The U.S. Treasury department in response to the results of this study said, they “strongly disagree” with the report’s conclusions. They go on to say that closing over 2,000 car dealerships “not only avoided a potentially catastrophic collapse” but also “saved hundreds of thousands of American jobs”. What I want to understand is how closing over 2,000 retail outlets for any product can help the manufacturer of that product. The more locations that a company can offer their product to the consumer, the more product they will sell. Starbucks is a great example of this. McDonalds is another.

Now remember that virtually all car dealerships are not owned by the manufacturers. They are owed by people like me or large companies like Auto Nation or Penske Automotive Group. Closing a retail outlet has very little short or intermediate term cost savings on the manufacturer, but it does reduce the number of cars it sells. There’s a good argument to be made for the negative long term impact of having too many retail outlets. Too many competitors can make it difficult for individual dealers to sell enough cars to maintain the necessary financial strength to compete effectively. The free marketplace tends to mitigate this negative effect because the stronger dealers will survive and the weaker perish. But in the short and intermediate term there was nothing to be gained by this government mandated closing of so many retail outlets for GM and Chrysler. And, it’s the short term that concerns us in this greatest recession since the Great Depression. In fact, this massive dealership closing is causing fewer GM and Chrysler products to be sold. Don’t you agree that McDonald’s would sell fewer hamburgers if it closed 2,000 franchises?

Now, everybody is talking about falling back into another recession. I can’t figure out how we can fall back into another recession when we haven’t come out of this one yet. Nationwide we’re still looking at 10% unemployment in round numbers. For a while everyone said that unemployment was a “trailing indicator”, meaning that everything was going fine and adding jobs would just happen last. Now the pundits are saying it’s not a lagging indicator but a “leading” indicator. That means that when people don’t have a job they don’t buy much. When the consumer stops spending, retail stores stop selling, and manufacturers stop making things.

The one thing that everybody can agree on is that unemployment is a very bad thing and for our government to have caused “tens thousands” of Americans to lose their jobs is also a very bad thing. The bottom line is that our government doesn’t know the first thing about how to run a private business and should keep its nose out.

Tuesday, July 13, 2010

“General” Bill McCollum; Shame on You!

We elected Bill McCollum to be our Attorney General, the chief law enforcement officer in Florida. Unfortunately, it seems that the only thing he has on his mind is being Governor of Florida. His actions in the AG’s office have suggested that he’s had this on his mind since his first day on the job as Florida’s Attorney General. From the get-go, he chose businesses and individuals to prosecute based on how much publicity it would generate and not on the negative impact on Florida’s citizens. A good example was the large sums of money he spent on, what seemed like thousands of TV commercials paid for by us taxpayers, featuring himself as the “protector” of Florida’s children from child molesters. Our money would have been better spent had he featured pictures of convicted, freed sex offenders than himself.

If there was any question how bad Bill wants to be governor, all you have to do is turn on your TV. Within 2 minutes you’ll see Bill and Rick (Scott) calling each other crooks and liars in political commercials. Rick Scott, a very wealthy businessman, has spent about $15M so far and Bill is catching up fast. In fact, he has caught up so fast that the PB Post wrote an editorial accusing him of using illegal campaign fund raising tactics. Suing the U.S. government over the new Health Care bill passed by the House and Senate and signed into law by President Obama was pure grandstanding. Every legal scholar knows that it has no legal merit and the purpose is to garner votes for governor.

Of course, my axe to grind with Bill McCollum is his politically motivated decision to give car dealers who practice unfair and deceptive advertising and sales tactics a “free pass”. The strong lobbying groups, the Florida Automobile Dealers Association (FADA) and the South Florida Auto Dealers Association (SFADA) have always supported Bill McCollum as have many individual dealers. Do you really think that car dealers give large sums of money to Bill McCollum because they want to protect the citizens of Florida? This is partially true because they do want to protect some citizens…those who are car dealers. And they want to protect those car dealer citizens from having the Florida Attorney General enforce the laws of Florida, specifically the Unfair and Deceptive Trade Practices Act as it specifically pertains to car dealers.

If you live anywhere in Florida, all you have to do is pick up your local newspaper and take a look at the auto classified section. Saturday is the best day to look because almost every car dealer likes to advertise on Saturday. In these ads you will see many ads that are actually illegal. Dealers advertise prices that don’t include their dealer fee which is required by Florida law. They advertise prices that don’t include “freight” which is already included in the price of the car by the manufacturer. They deduct what your down payment must be from the “price” they advertise understating the price by $3,000 or $3,500. They also deduct rebates from the price that you can only qualify for if you are a recent college graduate, an active member of the military, or if you drive the same make of car that they sell. This is all clearly illegal but I know of no dealer who has been charged with any of this.

It’s not like Bill McCollum can’t easily check any newspaper in the state, even from Tallahassee. He can do this online or he has AG representatives in every major community in the state. Also, what I just described to you happens just as blatantly on TV, radio, and in direct mail advertisements. The electronic ads are even more flagrantly deceptive. The fine print on TV is illegible and is flashed on the screen for such short time that you couldn’t read it if it were legible. The verbal disclosure is almost comical. They use a subdued voice and speed up the tape with the obvious intent of making it unintelligible.

Car dealers know that they can run any kind of advertisement and use any kind of deceptive sale tactic they want without fear of prosecution. This encourages the “bad guys” to run even more illegal ads. Another negative consequence is that this “hear no, see no, speak no evil” policy of our Attorney General forces the “good guys” to advertise in ways that they don’t like but feel they must. Imagine for a minute that you are a Nissan dealer. Your closest competing Nissan dealer advertises cars below his cost. If you sell a car for the price he advertises you will lose thousands of dollars. The way he gets away with this is by adding back in $3,000 + $740 + $799 + $500 to the advertised price. The $3,000 is the down payment the customer must pay. The $740 is the freight that the manufacturer has already included in the price once. The dealer fee is required by law to be included in the price. The $500 is only if you are a graduate of a 4 year accredited college within the last 6 months. The price the prospective customer sees in the ad is understated by over $5,000! If the “honest dealer” advertises his car in the newspaper at a price that he can make a profit on, he will drive business to the dealer who knows he can advertise anyway he wants without fear of prosecution. So the “good guy” has no recourse but to become a “bad guy”. He rationalizes this by saying that survival is our strongest instinct.

General McCollum, I would be happy to discuss this with you by phone or in person. If I’m off base, please set me straight. One thing you might want to do is pick up a Saturday copy of the Ft. Lauderdale Sun Sentinel, PB Post, or Miami Herald and read through the auto classified ads. Let’s talk about those ads if you’re not too busy slinging mud at Rick Scott. By the way, I’m not a supporter of Rick Scott.
You might be pleasantly surprised how much you would impress Florida voters if you cleaned up car dealer advertising and sales practices so that Florida car buyers wouldn’t be terrified to enter a showroom, as most are today.

Saturday, July 03, 2010

BUYING A CAR WHEN YOU HAVE A CREDIT PROBLEM


There are fewer things more sensitive or embarrassing than having to share your personal credit problems with a stranger. Having credit problems can also put many buyers in a weakened and defensive position when buying a car. Many people with bad, or too little, credit feel like the car dealer is somehow “doing them a favor” by selling them a car and getting them financed. Make no mistake about it. A car dealer is probably making more money selling a person with bad credit a car than one with good credit. If you have a credit problem, go about buying a car with the same care and due diligence as if you had the very best credit. Shop and compare your financing, your interest rate, and your trade-in allowance. Get at least three quotes on each of these.

Lenders who specialize in lending to those with bad credit are known as “special finance” lenders. Many of these lenders charge the dealer a large upfront fee, as much as $2,500. Legally, the dealer is not supposed to add this fee to the price of the car you buy but, in the real world, the price of the car is usually higher as the result of this fee. In addition to an upfront fee, the interest rates are very high from special finance lenders. Because they anticipate a much higher amount of repossession losses, they must make more on each transaction. Don’t automatically accept a dealer’s opinion that you must finance through such a lender. There are many conventional banks these days that loan to people with bad credit. Their interest rates are lower and they don’t charge large upfront fees.

There is much fraud in special finance lending. Credit applications are falsified to show more time on the job, higher incomes, etc. W-2 forms and check stubs are counterfeited. Buyer’s orders show accessories and equipment that do not really exist on the car. Hold checks or promissory notes are misrepresented as cash down payment. Co-signers signatures are forged. Confederates pose as employers, answering pay phones to verify employment. These falsifications are performed by finance managers, salesmen, brokers for special finance lenders (who are paid on commission) and the customers themselves. If you sign a credit application, be sure that you know all of the information on that application is accurate. Be sure that you understand and agree to all parts of the transaction including down payments, accessories on the car, etc. Never be a party to falsifying information to a lender to obtain a loan. This is a criminal offense.

Advertisements aimed at people with bad credit usually exaggerate with claims like, “We finance everyone”, “Wanted, good people with bad credit”, “No credit, no problem”, and, my favorite, “No credit application refused” (it doesn’t say your loan won’t be refused, just your application). My advice is to ignore these kinds of ads and these kinds of dealers. Their strategy is to take advantage of people with bad credit who they believe will buy any car, pay any amount of interest, and any profit to the dealers as long as the dealer can get them a loan.

It is common practice in Florida to encourage the car buyer to drive the car home immediately upon signing all of the papers. In some states like New York this is not permitted until all the car has been registered with the state in the new owner’s name. The reason for this immediate delivery (commonly referred to as the “spot delivery”) is to discourage and possibly even prevent the buyer from changing his mind. Taking possession of the car is a legal consideration making the purchase more binding. I recommend that you not rush the purchase or the delivery. For one thing you want to be sure that the car is exactly the way you want it…clean inside and out, all the accessories properly installed, no dings, dents or scratches, and that you have a complete understanding of how to operate all of the features of the vehicle.

I mention the risk of the “spot delivery” in this column on buying a car with bad credit because it can be especially harmful to someone whose credit is denied after the car has been delivered. You will most likely be required to sign a “Rescission Agreement” before you drive the car home. This is a legal document which requires you to return the car if your credit is denied. You will probably be told that your credit will be approved, but sometimes the dealer is wrong. The rescission agreement will have a charge for time and mileage that you have put on the car you are driving. Usually this is a very high charge from 25 cents per mile plus $50 per day and higher. It can take weeks for a special finance lender to rule on a credit application. If your credit is denied you could owe the dealer thousands of dollars which the down payment you made might not even cover.

As frightening as all of the above may sound, the one single thing you can do to prevent bad things from happening when you purchase a car is to choose your car dealer very carefully. How long has he been in business? What is his track record with the Better Business Bureau, the County Office for Consumer Affairs, and the Florida Attorney General’s Office? Ask friends, neighbors, or relatives who have dealt with this car dealer what their experiences have been like. Choosing a good dealer with integrity will resolve 95% of all your concerns.