What is the True Cost of that New Car?

It is almost impossible for you to determine the true cost of a new car. This might sound crazy, but many dealers don’t know the true cost of their cars. The manufacturers and distributors invoice their dealers for an amount when they ship them a car that is almost always several hundreds of dollars more than the true cost. It’s fair to say that in virtually every case the “invoice” for a new car is much higher than the true cost. By true cost, I am referring to cost as defined by GAAP, generally accepted accounting principles.

You probably have heard about “holdback”. That is an amount of money added into the invoice of a car ranging from 1% to 3% of the MSRP which is returned to the dealer after he has paid the invoice. Some manufacturers include the cost of regional advertising in the invoice which offsets the dealer’s advertising costs. Another fairly common charge included in invoices is “floor plan assistance”. This goes to offset the dealer’s cost of financing the new cars in his inventory. Another is “PDI” or pre-delivery expense which reimbursed the dealer for preparing the car for delivery to you. I could name several more, depending on the manufacturer or distributor. Some of these monies that are returned to the dealer are not shown as profit on his financial statement and some are. Technically a dealer could say that the cost he showed you reflected all of the profit (by definition of his financial statement), but the fact would remain that more money would come to back to him after he sold you the car. To me, that’s called profit.

Besides holdbacks and reimbursements for expenses, you must contend with customer and dealer incentives when trying to figure out the cost of that new car. You will probably be aware of the customer incentives, but not the dealer incentives. Most dealers prefer and lobby the manufacturers for dealer rather than customer incentives just for that reason. Also, performance incentives are paid to dealers for selling a certain number of cars during a given time frame. These usually expire at the end of a month and are one reason why it really is smart to buy a new car on the last day of the month.

Last but not least, remember the “dealer fee”, “dealer prep fee”, “doc fee”, “dealer inspection fee”, etc. which is added to the price you were quoted by the salesman.. It is printed on the buyer’s order and is lumped into the real fees such as Florida sales tax and tag and registration fees. Most dealers in Florida (it is illegal in many states) charge this fee which ranges from $500 to $1,000. If you are making your buying decision on your perceived cost of the car, even if you were right, here is up to $1,000 more in profit to the dealer.

Hopefully you can now understand why it is virtually impossible to precisely know the cost of the new car you are contemplating buying. Most often the salesman and sales manager is not completely versed on the cost either. Checking the cost on a good Internet site like www.kbb.com or www.edmunds.com is about the best you can do. Consumer Reports is another good source. One reason that Internet sites don’t always have the right invoice price is that different distributors for cars invoice their dealers at different prices.

Do not make a decision to buy a car because the dealer has agreed to sell it to you for “X dollars above his cost/invoice”. This statement is virtually meaningless. As I have advised you in an earlier column, you can only be assured of getting the best price by shopping several dealers for the exact same car and getting an “out the door” price plus tax and tag only.

 

Minimize the Pain of Having Your Car Serviced

The pain of buying a used or new car may be greater than the pain of having it serviced, but you need to have it serviced far more often than you have to buy a car. Below, I am listing eight suggestions to make your visit to your car dealer’s service department as pleasant as possible.

Choose the dealer with the best service department. Remember that you don’t have to have the same dealership service your car that sold you your car. You probably bought your car from the dealer who gave you the best price. You should have your car serviced at the dealer who can best maintain and repair your car. The price of service is important, but secondary to the quality of the service and repairs. Do a little research. Ask friends and neighbors who drive your make of car. Check with the BBB and the County Office of Consumer Affairs. Ask the service manager at the dealership to show you his factory score on CSI (customer satisfaction index). Every manufacturer surveys dealers’ service customers and ranks that dealer by how well he treats his customers.

Establish a personal relationship with your service advisor. The person in the service drive who writes up your repair order is very important. Be sure you get a good one. He should be knowledgeable, attentive to your needs, promptly return phone calls, and recommend only necessary services. You might not find this person on your first visit, but if you aren’t comfortable with the person you are dealing with, ask for one with whom you are. When you make an appointment to have your car serviced, always ask for that service advisor.

Don’t pay the“gotcha”, miscellaneous supplies fee. Almost all car dealers tack on a phony fee when you pay your bill which is simply more profit to the dealer, but is disguised by various labels. It is also sometimes called “environmental impact fee”, “sundry shop supplies” and many others. The cashier just adds a percentage ranging from 5% to 10% to your bill. This is no different than the “dealer fee” that the sales department tacked on to the price they quoted you on the price of the car. Most dealers will waive this fee if you complain about it, especially if you threaten to call the BBB, their manufacturer, or the Florida Attorney General’s office.

Always road test your car, preferably with the technician. If you brought your car in for a drivability problem such as a noise, vibration, or pulling to the right or left, don’t accept the car back until you ride in the car with the technician or service advisor and confirm that the problem has been remedied. I also recommend that you drive the car with the service advisor to demonstrate the problem when you bring it in. Experiencing what you experience always communicates your problem more accurately than listening to your description of the problem.

Ask for a written estimate of the total cost of repairs and maintenance. Florida law requires that the dealer give you a written estimate. By law, they may not exceed this by more than 10%.

Make an appointment ahead of time. You should insist on making an appointment and you should try to make that appointment at a time when the dealer’s service department will be least busy…typically the middle of the afternoon on weekdays or Saturday and Sunday. Avoid the 7:30-8:00 morning rush. When your service advisor has written up your repair order, ask him how long it will take. After he tells you, ask him to let you know ahead of time if, for any unforeseen reason, your car will not be ready in the promised time. Often times when you call a service department they will tell you to “bring the car in anytime” or “come right over”. Service advisors will tell you this because they are either too busy or too lazy to take the time to make a proper appointment. When they tell you this, tell them that your time is very valuable and that you insist on an appointment at a time when they can get you in and out quickly. Always write down the name of the person that gave you the appointment.

Shop and compare high cost repair prices. Most service departments are competitive on maintenance items like oil changes, wheel alignments, and tire rotations. However, the costs of major repairs can vary considerably. If you are looking at an air-conditioner, transmission, or engine repair that can cost several thousands of dollars, get bids from more than one service department. Often just suggesting that you will do this will keep the cost down from the dealership you prefer.

Introduce yourself to the service manager. This falls along the same philosophy as developing a good personal relationship with your service advisor. It can’t hurt to know the“boss”. If you are on first name basis with the service manager, it just might earn you a slightly higher level of treatment from those that work for him.

A Real Out-the-Door Price!

You’ve heard the term, “Out-the Door” price, many times and the chances are that you’ve used it yourself. There’s also the common phrase “Bottom-Line” price. In my dealership, I post all of my prices online and on my cars, but they really aren’t “Out-the-Door” prices because I don’t include the sales tax or the Florida state tag and registration fees. Although I’ve considered doing this, I haven’t for a few reasons…sales tax varies based on if there’s a trade-in and the value of the trade-in. Tax and registration vary depending on whether it’s a new tag or a transfer and the date of birth of the purchaser. I could assume the highest sales tax and tag and registration amounts, but this would make my price look higher than all other dealers who never include this in their advertising. 

What all of this means to you, the car buyer, is that NO ADVERTISED PRICE is an out-the-door price or a bottom line price. In fact, NO PRICE, VERBAL OR WRITTEN, is an out-the-door price. The danger is that almost all car dealers will tell you that the advertised price and the price they verbally quoted you is out-the-door or bottom-line. These terms have, unfortunately, become all too common, but they are very misleading. 

A prudent car buyer should shop and compare prices between competing dealers even if they a use a third party car buying service like TrueCar.com or Costco. Most car dealers do not want you to have an out-the-door price for this very reason. They do not want you to be able to shop and compare their price. The price that they advertise and “say is out-the-door” excludes, not only sales tax and tag/registration fees, but additional profit to them that are disguised as “official fees” and dealer installed accessories. 

The “Dealer Fee” (which is a generic term for additional dealer profit) goes by many other names and was created by dealers to trick you into paying them more profit than their advertised price. Unfortunately the dealer fee was made legal in Florida thanks to the strong lobbying power of car dealers and their associations like FADA, the Florida Auto Dealers Association. In fact, not only did the Florida legislature make this legal, but they also allow dealers to name the dealer fee anything they like and allow them to charge as much for it as they want. Some of the common names used by dealers are Administration Fee, Doc Fee, Dealer Prep Fee, Handling Fee, Pre-delivery Inspection Fee, E-Filing Fee, Electronic Filing Fee, Tag Agency Fee, Notary and Closing Fees, and Dealer Services Fee. Many dealers add more than one of these and the total dealer fees can exceed $2000! 

The E-Filing Fee, Electronic Filing Fee, and Tag Agency Fee are often included with the sales tax and tag and registration fees. These are the most deceptively named dealer fees of all. Dealers commonly do not disclose these as dealer fees as required by Florida law and some do not even charge sales tax on this profit which is another violation of Florida law. Sales people will usually tell customers that these fees are part of the tag and registration fees from the state, which is an outright lie. 

The other broad category of trick that dealers use to enhance their out-the-door price is “Dealer Installed Accessories”. They add these to all the cars they sell and they typically increase their “out-the-door” price by at least $1,000. These dealer installed accessories consist of products that cost the dealer virtually nothing with super-inflated prices. Some common examples are nitrogen in tires, window etch, pin stripes, paint sealant, fabric protection, and road-side assistance. A typical addendum sticker which list the dealer installed accessories for $1,500 would have an actual cost of less than $100…a 300% markup!

The “surprise” you get when you try to buy a car at the advertised or quoted price averages over $2,500, not including the government fees of tax and tag. Advertised prices are typically far below what the car dealer will sell you the car for and are sometimes below his true cost. Dealers know that his competition is advertising unrealistically low prices and they have to meet or beat those prices. Dealers feel that if they advertised an honest price, they would actually be driving business to his competition. 

Now comes the hard part…how can you persuade a car salesman to give you his true-out-the-door price? I’ve learned from experience that there are two ways that work the best. I learned these from years of sending mystery shoppers into car dealerships all over South Florida. Technique #1 is to tell your salesman that you must have an out-the-door price including tax and tag in writing. He will surely respond that he cannot do this unless you’re buying the car right now. He may even tell you the truth which is that he does not want you to shop his price with his competition. You then respond that you will compare his price with your competition and you might buy a car from them. But if he gives you a good enough price, there’s a chance that you will come back and buy from him. On the other hand, if he refuses to give you a price, you will leave and never come back and that means he has NO CHANCE that you will buy a car from him. 

The second ploy, technique #2, that works fairly well is a little devious, but sometimes you have to “fight fire with fire”. Tell the salesman that you have to have a signed copy of the buyer’s order/invoice of the car he’s selling you with the out-the-door price for your credit union or bank. The credit union or bank needs this so that they can issue you a check which you will return with when you take delivery of the car. You can also add that they will also advise you if this is a fair price. This works most of the time. 

Of course, when you do get the dealer’s out-the-door price by either of these methods, you should shop and compare this price with at least two more dealers. It’s a shame that car buyers have to go to all this trouble to get an honest out-the-door price, but car dealerships are an anachronism, doing business the same way they did half a century ago. They are changing, albeit slowly, because of the Internet, the educated consumers of the 21st century and companies like TrueCar.com and Costco’s auto buying program.

Why Hondas Cost More Than Other Cars

When you buy a Nissan, Toyota, Ford, Dodge or any other low to medium priced car the dealer’s markup is much less than the markup when you buy a Honda. Yes, Hondas are better than many other makes. They score above average in quality, reliability, and low maintenance, but there are quite a few makes that are as good and maybe even better. Honda dealers sell you their cars at a higher price and profit margin than any other low-to-medium price make dealer because of something called the Honda Dealer Advertising Covenant.

This document is a contract that all Honda dealers must agree to and sign or experience huge financial penalties which would put them out of business. As a consequence, I’m aware of no Honda dealer in the USA that does not abide by the Honda Dealer Advertising Covenant. The key language is “ADVERTISED PRICING CANNOT BE BELOW DEALER INVOICE.”

You may be thinking, why should a rule stating Honda dealers cannot advertise below their cost be such a bad thing? After all, why would any car dealer want to advertise and sell cars below his cost? The answer is that Honda dealers’ (and all make car dealers’) factory invoice IS NOT HIS COST. All auto manufacturers “pack” profit into the factory invoice when they bill the dealer for their cars. This hidden profit comes in many forms such as “holdbacks” which are 2% to 3% of the MSRP and is standard for all manufacturers. A new Honda with an MSRP of $20,110 has an invoice of $18,753.68. Holdback is $385.80 and this amount is “kicked back” to the Honda dealer every 30 days. At this time this Honda has $1,200 in “dealer cash” packed in which is a secret rebatethat customers don’t know about. There is also something called the “Honda Transfer Balance” which is essentially another holdback profit kicked back to the Honda dealer. The sum of this hidden profit contained within the “invoice” is $1,875. The true cost of this Honda to the dealer is $16,878.53.

The average car has an MSRP of over $35,000 and holdbacks and other kickbacks on higher priced cars are even greater. Depending on the time of the year, the model, and the MSRP kickbacks to dealers can easily amount to well over $4,000. This means that all Honda dealers are required by the manufacturer to advertise their cars with a minimum built in profit of between $1,500 and $4,000 and even much higher.

It’s no surprise that Honda dealers love this advertising covenant. All of their advertising has a good profit built into the price. No other car manufacturer has this requirement although Toyota is thinking about changing their advertising covenant to copy Honda’s. At this time, all other make dealers are highly competitive in their advertising. This is good for you, the car buyer, because competition between car dealers keeps the price down.

The average profit on a new car is much less than many people think. Of course it varies by make, supply and demand of each model, and the time of year. The average profit on a new car, after all variable expenses, is around $1,500, but that is an average. Profits on each car sold by a dealer vary widely from zero (or below) to $10,000 and higher! Almost all cars are still sold by negotiation (haggle/hassle) and the shrewd negotiator gets the low price and others pay much higher.

What this means for Honda dealers, is that they have a huge “leg up” over all other make cars being sold. The best price that anybody can get on a Honda is the invoice which already has a higher than average profit “baked into it”. No matter how badly a Honda dealer wants to sell a particular car, he is prohibited from advertising it below a pretty good profit margin. This is not to say that a Honda dealer cannot sell the car below invoice, but it’s highly unlikely that he would. The main reference that buyers have for determining a low price is advertising and the floor on all advertised Hondas is fixed by Honda, the manufacturer. Only buyers who know about the Honda Dealer Ad Covenant and also know that the factory invoice has lots of profit hidden within it are likely to even ask for a discount from the advertised price, and certainly not when the dealer can show you his “invoice”.

I know very little about anti-trust law and I’m not even an attorney. But as a car dealer for many years, I’ve always marveled at why Honda was able to “get away” with this. I copied and pasted this excerpt from the website for the Federal Trade Commission: Price Fixing

Price fixing is an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms. Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor. When consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.

Honda dealers compete with each other much more so than they compete with other make dealers. I’m a Toyota dealer and other Toyota dealers in my market are my most intense competitors. Most car buyers make up their mind which make car they want to buy and then compare prices among dealers of that make for the lowest price. I don’t understand why the Federal Trade Commission does not consider Honda’s Advertising Covenant PRICE FIXING. I understand that it is the Honda manufacturer that “forces” their dealers to advertise artificially high prices but the net negative effect on the Honda buyers is the same as if it were collusion only among the Honda dealers. Isn’t it the consumer that the FTC is supposed to be protecting? If I had to guess, I would say that the Honda dealers strongly influenced Honda to adopt this clause in their advertising covenant. It benefits the dealers and does not benefit Honda at all. In fact, one could argue that it harms Honda because selling Hondas at artificially high prices should reduce the total number sold. I wrote above that Toyota is considering copying Honda and Toyota dealers are strongly encouraging Toyota to adopt fixing the minimum advertising price at dealer invoice. Can you imagine the negative effect on car-buyers if all manufacturers followed suit!

You may have seen in the news last week that Lexus will begin a pilot program this January with their dealers posting their lowest selling price on every car they sell. Eliminating the haggle/hassle negotiation process has been on the minds of a lot of manufacturers and dealers. Old habits are hard to break, but most everybody agrees that the current way cars are sold is a “dinosaur” that must be replaced. A few car dealers around the country have made this move, including me. I changed to posting my lowest price on all of my cars 3 years ago and it’s made my dealership very successful and my customer very happy. I outsell all single point car dealers between Orlando, FL and Ft. Lauderdale, FL…about 300 miles. I’m the only one-price dealer in this area and I attribute a lot of my success to this fact.

Why do I bring this up when the subject of this article is “price fixing and the Honda dealer advertising covenant”? If I were a Honda dealer, or if Toyota copied Honda’s advertising covenant (as is being considered), I could no longer tell my customers what my low selling prices are! I would be forced to raise my prices on most of my cars because my lowest prices I now post are mostly below invoice. Currently I post all of my prices on all of my new and used cars online. If I had to abide by the advertising covenant most of these prices would be a violation of the advertising covenant.

Hopefully sane heads will prevail and Toyota will not adopt Honda’s ad covenant and hopefully the Federal Trade Commission will take another look at Honda’s advertising covenant to reconsider if this is a bad thing for the consumer

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.