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Monday, May 19, 2014

Why Do Car Dealers Advertise Cars Priced Below Their Actual Cost?

Many of those cars you see or hear advertised on TV, radio, and newspaper would be great buys, IF YOU COULD buy the car. The problem is that the advertised cars cannot be bought at the advertised price. You might ask, how I can I know this? You might also suspect that, because I’m a car dealer, I’m just making mean spirited, unfounded allegations against my competition. For many years, at least once every week, I’ve “mystery shopped” car dealers all over South Florida. A mystery shopper is a person I train and pay to surreptitiously visit a car dealer in response to his advertisement on a specific car. The shopper feigns interest in buying a specific car advertised and is instructed to take the buying process as far as the seller will allow. In fact, in some cases we have asked the shopper to actually buy the car, but only if the dealer will sell the car at the advertised price. So far, we’ve never been able to buy a car at the advertised price, or even to get a signed contract to do so.

The reason for this is that most car dealers will never advertise a price that a competitor can beat and the only price a competitor would refuse to beat is one that is below his true cost. This means that 99% of the cars advertised cannot be bought at the advertised price. Their strategy is to lure you into their dealership at a price that is “too good to be true”. The car dealers’ vernacular for this kind of advertisement is “low ball” and the Federal Trade Commission calls it “bait and switch”. There are several ruses that car dealers use to avoid selling you the car at the advertised price.

(1) The most common is the “dealer fee” which is required by law to be included in the advertised price. Most dealers don’t obey the law and the Florida Attorney General does not enforce the law. Those that do follow the law have only one car available at the advertised price. If they do sell it to a very persistent buyer, they chalk up the loss on one car as a cost of advertising. The law permits the dealer to add the dealer fee to the price of all the other cars that weren’t specifically advertised, even though they are identical. The ad car is identified by a “stock number” hidden in the fine print.

(2) Probably the second most common bait and switch trick is “dealer installed accessories”. These usually consist of grossly overpriced items like “nitrogen in tires”, paint sealant, pinstripes, windows etch, and floor mats. These items typically cost a dealer less than $100, but he will price them over $1,000. The advertisement will sometimes disclose something like “prices don’t include dealer accessories”, but this is violation of the FTC law on fine print contradicting the advertised price.

(3) Another, not uncommon practice is to advertise a current year car that appears to be new, but in fact is used. This is also sometimes disclosed in the fine print. Dealers will often advertise current model cars that they have in their rental companies.

(4) Advertising a new car that has hidden features which would dissuade you from buying it. A favorite trick is advertising a new car with a manual (stick shift) instead of an automatic transmission. Another ruse is to have a very unpopular color, exterior and interior trim. Dealers even advertise “new” cars with lots of miles. There’s nothing in the law that prohibits a dealer from calling a car new because it has lots of miles. New cars can accumulate hundreds or thousands of miles by being driven between dealerships when they are “dealer traded”. Dealers commonly buy or trade cars with other dealers to get the right color and accessories on the model a customer wants. New cars are commonly driven by prospective customers who change their mind or whose credit turns out to be bad.

(5) As you probably know, most car salesmen are paid strictly on commission. This commission is typically 25% of the profit they make on the car you buy. The higher the price they sell the car for, the more they make. The advertised cars have no profit and usually there is no commission paid for selling it. Even if the dealer is willing to sell an advertised car at below his cost, what are the chances a salesman will sell it to you? He will do everything in his power to get you to buy another car where he can make a commission. This includes telling you that car has already been sold.

The best thing you can do is to ignore all advertised car prices and do your own independent research on what a good price is. You can learn this from Consumer Reports, Edmunds.com, and KBB.com. My favorite is www.TrueCar.com. When you determine what is a good price on the car you want to buy, get at least three out-the-door prices from three competing dealers.

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