Earl’s Costco Auto Buying Program Tutorial

I’m a strong advocate of the Costco auto-buying program. In full transparency and disclosure, I’m also a certified Toyota dealership for Costco. I get more questions about the Costco Auto buying program than just about anything else and that’s my reason for writing another article on the subject.

My only complaint about Costco’s program is that, in my opinion, there’s too large a burden of due diligence placed upon the Costco car buyer. I believe that a Costco member should be able to go online at www.CostcoAuto.com and get the out-the-door price of the vehicle they want and the dealership they can buy it from. Sadly, this is not often possible, and what follows is a “tutorial” of the precise steps you most follow to get the true Costco member price. 

1. Go to www.CostcoAuto.com. Click on “New Vehicles” and enter your zip code. Select the year, make and model of vehicle you want to buy. NEVER GO TO THE DEALERSHIP WITHOUT REGISTERING ONLINE. You may be deceived by a non-Costco certified salesman into believing you’re getting the Costco price.
2. Click on “Locate Dealer”.
3. Enter your name, Costco member number, and email address. Click again on “Locate Dealer”. If you’re not a Costco member, I recommend you pay the nominal annual member ship, $65, and become a member. Your savings on buying a car will exceed this cost many times.
4. You will be given the name of the dealership and the name of the sales people at that dealership that are certified Costco representatives. DO NOT, UNDER ANY CIRCUSTANCES, DEAL WITH ANY OTHER SALES PEOPLE.
5. You will be contacted by phone and email almost immediately by the Costco representative. Verify that she or he is named on the Costco website.
6. Ask the Costco representative to email you the out-the-door Costco member price on the vehicle you have selected. Explain that this price must include all charges by the dealership except government fees…sales tax and license tag and registration. If she or he refuses, report this to Costco at 800 755-2519.
7. If you must visit the dealership to further evaluate the vehicle you’re buying, demand that you see theCostco Member-Only Price Sheet. This price sheet on the specific car you’re buying should disclose any added price for dealer installed accessories. If there are dealer installed accessories, DEMAND A CAR WITHOUT THEM. This price sheet must also disclose any added, hidden non-government fees aka “dealer fees” by many names like doc fee, electronic filing fee, tag agency fee, dealer prep fee, administrative fee and notary fee.
8. Determine your own out-the-door price by adding any of these hidden fees or dealer installed accessoriesto the “Costco Price”. Also beware of hidden fees that aren’t disclosed on the Costco Member-Only Price Sheet. These will “pop up” later in the F&I or Business Office and are unknown and unacceptable to Costco.
9. To be safe, you should shop and compare the final out-the-door price you’ve calculated with at least two other dealers.
10. If your experience with the Costco dealer was not a good one and they did try to deceive you, contact Costco at 800 755-2519. You will be asked by Costco to fill out a customer satisfaction survey after your purchase which will entitle you to service and parts discounts with that dealer.

Costco requires their certified dealers to sell Costco members cars at a LOWER PRICE THAN THEY SELL CARS TO ANY OTHER CUSTOMER. You may or may not know that most car dealers sell the same car to different buyers at vastly different prices…depending on the sophistication of the buyer, the salesman, type of advertising, and even the time of the month. A few buyers get extremely low prices which requires a certified Costco dealer to sell a Costco member the car at an even LOWER price. Car dealers don’t like to do this and come up with very clever ways to trick Costco buyers into paying more…hidden fees and dealer installed accessories are two of their favorite tricks. COSTCO MEMBERS BEWARE.

How Do You Learn the Dealer’s Cost on a Car?

It’s 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 thousands 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 the term, “holdback”. That is an amount of money added into the invoice of a car ranging from 1% to 3% of the MSRP which is kicked back to the dealer after he has paid the invoice. In some cases, there are two holdbacks…one from the manufacturer and one from a distributor. Some manufacturers include the cost of regional advertising in the invoice which offsets the dealer’s advertising costs. Another 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 inspection expense which reimburses 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 dealers’ financial statement and some are. Technically a dealer could say that the cost he showed you reflected all the profit defined by his financial statement, but the fact remains that more money would come to back to him after he sold you the car. To me (and the IRS) that’s called profit.

Besides holdbacks and reimbursements for expenses, you must contend with customer and incentives or rebates (usually referred to as “customer cash” or “dealer cash”) when trying to figure out the cost of that new car. You may 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 or a quarter, 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 hidden fees named whatever the dealer chooses… “dealer fee”, “dealer prep fee”, “doc fee”, “dealer inspection fee”, “electronic filing fee”, “e-filing fee”, “tag agency fee”, “taxable fees”, etc. which are added to the advertised price or the price you were quoted by the salesman.. They are printed on the buyer’s order and sometimes the worksheet and are lumped into the real fees such as state sales tax and tag and motor vehicle registration fees. Most dealers in Florida (it is capped or illegal in many states) charge these fees which range from $500 to $3,000. If you’re making your buying decision on your perceived cost of the car, even if you were right, here is up to $3,000 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 are 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 decide 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. You are playing into the dealer’s hands when you offer to buy, or he offers to sell, his car at a certain amount above his cost. 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,GOVERNMENT FEES.

How and Why Car Dealers Sell You Things You Don’t Need or Want (or even know about)

If you bought a new car recently, the probability is almost 100% that there were products and services added by the car dealer to the price you paid for the car. You may not even know that you paid extra for items like interior fabric protector, paint sealant, rental car assistance, roadside assistance, nitrogen in your tires, glass etching, pin stripes, and window tint. The one thing all these items have in common is that they’re over-priced. The markups on these products are much higher than any factory accessory installed by the manufacturer. Factory accessories like cruise controls, sunroofs, and navigation systems are marked up in the range of 15% to 25%. Dealer installed accessories are marked up 100% to 500% and higher.

Non factory installed accessories are also pre-installed by auto distributors. When cars first were retailed in the early 20th century, they were sold to the retail buyer through dealerships that were owned by the factories like GM, Chrysler, and Ford. This evolved as sales grew to factory owned distributors that distributed cars to independent dealers. When imported cars like Honda, Nissan (Datsun), Mazda, and Toyota became popular, they were mostly sold through independently owned distributorships that established networks of car dealers. Most of these distributorships have vanished and the manufacturers sell most of their car directly to independent car dealers. The largest and most notable exception is Southeast Toyota (SET) headquartered in South Florida. SET buys all their new Toyotas directly from Toyota and resells them to all the Toyota dealerships in Florida, Georgia, North Carolina, South Carolina, and Alabama.

Because Toyota is, by far, the best-selling vehicle in the Southeast USA, the impact of the non-factory, pre-installed package named “ToyoGuard” is worthy of mention. Most Toyota dealerships in the Southeast and nearly all in South Florida order most of its cars with this distributor installed accessory package. The platinum ToyoGuard package retail price is $699. The cost to the dealer (if he orders at least 75% of his vehicles so equipped) is only $225. That’s a 311% markup! I’m not sure what the actual cost to Southeast Toyota is, but it’s probably a lot less than $225. Included in this package are fabric protection, paint sealant, rental car assistance, roadside assistance, 2 oil changes, and 4 tire rotations. One can debate the value of this “$699” package, but the fact that the true cost to the dealer is only $225 and the true cost to SET is less than that is indisputable.

The fact that the true cost of ToyoGuard and all dealer installed accessories is a tiny fraction of the retail price is not the main reason I object to them. The main reason is that I believe the retail buyer of a new car is entitled to choose the accessories on the car she buys. Extra, over-priced accessories on an “addendum label” next to the factory window sticker are likely not something the buyer wants or, most likely, even knows about.

I fully support the right of car dealers and distributors to sell extra accessories to their customers. But the features, benefits, and value of these accessories should be presented first, and sold only if their customer agrees that they are a true value at the price charged. When a car dealer or distributor adds accessories to almost every car he sells before the retail customer has a chance to say “no”, it’s ethically and morally wrong.

To avoid being duped into buying something you didn’t want or know about, always ask the salesman this question. “Does the advertised price and the price you quoted me include any accessories that were not installed by the vehicle manufacturer?”

11 RED FLAGS TO WATCH FOR WHEN BUYING A CAR

(1) The “Big Sale Event”. If you look in today’s newspaper, you will find that most car dealers in your area are having a sale of some kind. It may be because of a current holiday, “too large an inventory” of cars, to “reduce their taxes”, “the manager is out of town”, or some other nefarious lure. Advertising 101 says that you should give the prospective buyer a “motive to act”. Unfortunately, it doesn’t matter whether the motive is real or not. The fact is that most car dealers do not sell their cars for less during “sales events” than they do at any other time. I point this out so that you don’t rush your buying decision. If you don’t buy a car during the tight time constraints of a phony sales event, you can negotiate just as good a price the next day. The exceptions to this are legitimate rebates offered by the manufacturer. These often expire at the end of the month which is one reason why the “last day of the month” really can be the best time to buy a car”.


(2) This is the out-the-door price, plus FEES. Every car dealer I know of adds (except me) raises the price he gives you by tacking on multiple PHONEY FEES, disguised asgovernment fees. Many buyers never realize that the total price includes an average of over $1,000 (as much as $3,000) in hidden added profit to the dealer. Customers don’t know this because the paperwork you sign when you think you’re buying the car is not a legal document (vehicle buyer’s order), but a worksheet. You sign the legal documents in the F&I or business office when the law requires disclosure of non-government fees. These are hidden in the fine print along with lots of other fine print that nobody reads. Most buyers assume that the big increase in the price they thought they were paying is from sales tax and license-registration government fees. The names of these fees disguise them to make you think they’re paid to the government…electronic filing fee, e-filing fee, doc or documentary fee, tag agency fee, etc.

(3) “The Price I’m giving you is only good for today”. If a salesman or sales manager tells you that, it is probably only a tactic to push you into buying the car. The only exception would be the expiration of a factory rebate. Once again, this is simply a tactic to push you into buying before you have a chance to do your comparative price shopping.

(4) “Take the car home tonight and see how you like it”. Driving the car you are considering buying home can be a good thing. It will give you a lot better idea about how the car performs, etc. However, there are two reasons the car salesman offers this. One is that you must leave the vehicle you might be trading in with the car dealer. This means that you cannot shop prices with other dealers. The second reason is the psychological impact of parking that new car in your driveway where your family and neighbors can see it. The slang expression for this is “the puppy dog”. If you were to take home a little puppy from the pet store, you and your children would fall in love with her and could not return her the next day.

(5) “You must give me a deposit before I can give you a price”. This must be one of the most insulting ways that some car salesmen have of intimidating a prospective buyer. It’s amazing how many people succumb to this which allows the salesman an element of control…. you can’t leave until they give you your money back. If confronted with this ultimatum, simply walk away.
“Are you ready to buy a car today”? Often, if you say no to this question, the salesman will tell you to come back when you are ready to buy. He will tell you to shop around and come back with your best price so that he can beat it. The salesman is afraid that, if he does give you his best price, you will go somewhere else and that salesman will beat it. Of course, that is the whole idea of competition and that is exactly what you want to do. If the salesman is afraid to give you a price because his competitor will beat it, it must not be the best price!


(6) “Make me an offer and I will take it to my manager for approval”. This is a very common tactic which you have probably already encountered. It is not unethical. It is simply part of negotiating. I point this out so that you are fully aware that this is part of the negotiating game. Be aware, that no matter what price you offer, the manager will ask you for more money. Even if you offered a high price that would be a very large profit for the dealer, the manager would ask you for more money. The psychology behind this is that if you suddenly accepted the offer, you may frighten the customer by thinking he had offered too much (which he would have). When you negotiate, you must be well versed on what is a good price for that car. Start out below the best price you think you can buy it for. If you cannot negotiate a price close to your best price, get up and leave. Continue this process with another car dealer.

(7) The “really big” discount. The other day a friend showed me direct mail advertising piece from a new car dealer with a coupon good for $2,000 discount on any car in his inventory. This is very common for newspaper and TV ads too. Federal law requires new cars to have a price sticker on the window named the Monroney label. A discount from this suggested retail price gives you a fair basis for comparison. Unfortunately, most car dealers today, increase the suggested retail price substantially with the use of an addendum to the Monroney sticker often referred to as a “Market Adjustment Addendum”. This “adjustment” can be several thousands of dollars. Be sure you know what the asking price is for the car when you have been offered a “big discount”.

(8) The” really big” trade-in allowance. Car salesmen are trained to seek out your “hot button”. Some car buyers are focused on how much the car dealer will offer for his trade-in. It’s very easy to offer you more for your trade-in than it’s truly worth by simply inflating the price of the car you’re buying by hidden fees, dealer installed accessories, or by simply inflating the MSRP.

(9) The “very low” monthly payment. Everybody is a “sucker” for a low monthly payment. That’s why leasing is so popular today. We budget all our spending around our weekly or monthly salaries. It’s easy for us to overlook the fact that it’s not only the amount of the monthly payment but the total number of payments and the down payment hidden in the fine print that counts.

(10) Just $100 above “dealer invoice”. Webster defines “Invoice” as the price the buyer pays to the seller. It should be ILLEGAL for manufacturers and car dealers to label the document that they send car dealers when they sell them a new vehicle as an invoice. THE INVOICE IS NOT THE SELLING PRICE BY THE MANUFACTURER TO THE DEALER. The invoice conceals multiple hidden kick-backs to the dealer by innocuous names like holdback, dealer incentive, advertising fee, floorplan assistance, etc. A car dealer averages thousands of dollars of kick-backs on each vehicle invoice he buys. Many dealers sell most of their new vehicles below invoice. Interestingly many manufacturers don’t allow their dealers to advertise prices on new cars below dealer invoice. One could conjecture that this may have the effect of artificially inflating the fair market price of new vehicles.

(11) “We want to buy your used car”. First, let me say that car dealers do like to buy used cars from the public; it’s not always a ruse to sell you a new car. Dealers like to buy used cars from you because they can buy them for much less than they must pay at the auto auction where other car dealers are competing to buy the same vehicle. However, most advertisements that you see (especially direct mail) are just trying to trick you into coming into the dealership so they can sell you another new or used car.

The best protection from all the above is to find a car dealer that you can trust. Ask your friends about their experiences with dealers and call the Better Business Bureau and the County Office of Consumer Affairs. Check the dealers’ Google rankings. A good tip on reading Google rankings is to ignore the “5 stars and “0 stars”. Read the 3- and 4-star ratings. They’re likely to be more real and thoughtful. All things being equal choose the dealership that has been in business a longer time and an owner or general manager who will make himself accessible to you and all his customers.