Car Salesmen Don't Look Like Car Salesmen Anymore

Many of my readers know that I send mystery shoppers weekly to car dealerships around South Florida so that I can learn how they are selling, leasing and servicing cars. I do this for two reasons. The first is that this is a common practice for all businesses to learn how their competition operates and to have the competitive edge you really need to know how your competitors do business. The second reason is that I feature a mystery shopping report on my weekly radio show, Earl Stewart on Cars that airs between 4 and 6  every Tuesday afternoon. I've done hundreds of these mystery shops and I've noticed an interesting trend over the years.

Back in the day, car salesmen looked and sounded like what many people consider the stereotype for a car salesman. You know what I mean, gold chains, diamond pinkie ring, sunglasses, loud shirt, and white shoes. As car buyers became more educated, sophisticated, and demanding, it didn't take car dealers long to realize that they had to dress their car salesmen in a nicer fashion, “lipstick on a pig”, But even though they looked nicer, they sounded and acted pretty much the same.

With the advent of the Internet, Google in particular, today’s consumer has made a quantum leap in knowledge, education and sophistication. Today’s buyer of virtually everything is far more demanding and far less tolerant of deceptive advertising and sales tactics.

The most recent shift I've seen in car dealers’ efforts to make their salesmen seem less threatening is in who they hire and how they train their salesmen to behave. More and more car dealers are hiring younger sales people, and fewer older, experienced salesmen. These dealers want their sales people to treat their customers with courtesy and respect and gain their confidence. We've all heard the terms con man and con-artist. We also know the verb, to con. To con somebody means to steal from them as in Bernie Madoff. Did you know that “con” is short for confidence? A successful con man is good at gaining the confidence of his victim. The con man’s appearance and how he sounds play a critical role in this. I often hear people who were taken advantage of and stolen from say, “He looked and sounded like such a nice person”. Think about that for a minute. How successful could a crook be who looked and sounded like one?

The important thing to remember is that it’s usually not the car salesman who is responsible for the deception. Certainly he cannot be held accountable for the deceptive and often illegal advertising. In fact, many car sales people hate the advertising that brings prospective customers into the car dealership by false and misleading promises. Especially in today’s economy, many people work in car dealerships because they can’t find a job anywhere else. Imagine how embarrassing it must be to salesman, new to the car business, when he must try to explain away a bait and switch advertisement. How can you tell a prospective customer that the “sale car” on the showroom floor costs several thousands of dollars more than the one advertised on TV? In my mystery shops, it’s becoming more and more common for the salesman to “nicely” tell my shopper when she asks to see the advertised car that they can’t really buy the car for that price and to apologize for the deceptive ad! These sales people will say right up front that the ad is just to get you to come in so that they can try to sell you a car at higher price.

Also, the salesman is often an innocent victim when it comes to the deceptive sales practices. Many car dealers use attractive, friendly sounding sales people to lure the fly into the web. It’s been proven in studies that customers put more stock in the individual they deal with at a store than the store itself. If that salesman can capture your trust and especially if he can make you like him, the car dealership is 90% closer to closing the sale.

Today’s sales people are really more “greeters” than sales people. Many car sales people today are not privy to the cost or even the selling price of the cars they “sell”. The true cost of the car is known only by the sales managers who are also known as closers and team leaders. These managers are also the only ones authorized to quote a price. They also appraise your trade-in. The interest rates you pay and the warranties, maintenance plans, GAP insurance, etc. that you buy are all handled by mangers.

The bottom line is that it’s not the rude, aggressive car salesman you need to be afraid of. There are very few of those around anymore. The car dealers have wised up and you will be dealing with young, attractive, non-threatening, and polite sales people today. In many cases, they know very little about the unfair and deceptive sales and advertising. What little they do know makes them feel bad but they need the job and want to put food on the table for their family. As much as you like this salesman or saleslady, don’t give him or her your trust when it comes getting a fair price, trade-in allowance, lease payment, or interest rate. That nice, smiling sales person is the dealer’s pawn and is “just following orders”. Verify all of the numbers your new friend gives you by competitively shopping and comparing at least two other car dealers.

The Lemon Law: Your Nuclear Option

Lemon laws are state laws which give rights to purchasers of new vehicles if they find that they have bought a car with a defect that cannot be fixed in a timely fashion by the dealer or the manufacturer. Every states lemon law is somewhat different but they all have a lot in common and are aimed at the same result. Most car buyers have misconceptions of the lemon law. These are some the most common ones: The car owners think they are going against their car dealer when they are really going against their car’s manufacturer. If you prevail it costs the car dealer nothing. The manufacturer pays. The law applies only to cars purchased as new, not used. If you win a lemon law dispute, the manufacturer or dealer does not simply replace your car with a brand new on. The amount of credit you win toward a replacement vehicle is arrived at by deducting a charge for the usage of your lemon car based on time and mileage.

 

The complete lemon law process is a difficult and time consuming task for all concerned…you, the car dealer, and the manufacturer. It’s difficult for you because the law requires specific and extensive documentation. You must have allowed your dealer to try to fix the problem at least three times and you must have detailed written documentation of this. You must be sure that your complaint is clearly spelled out by the dealer on your repair order and that his failure to fix it is also a matter of written record. After three times, you must notify the manufacturer by certified letter that you are invoking the lemon law. Now the manufacturer has one last chance to fix your car. At this time, the manufacturer may take your car to another dealer who he feels is more competent in repairing your car. If the fourth attempt to fix your car fails, your case is assigned to a board of arbitrators. Their ruling is final. This entire process usually takes a very long time. A time of several months is not uncommon. Meanwhile, you’re saddled with a car that has a problem nobody can fix. 

 

When you formally invoke the lemon law with your certified letter, you sever all communications with the manufacturer other than formal, legal communications as dictated by the law. The manufacturer considers you a legal adversary and their attorneys consider anything they say to you as something that can be used against them in the arbitration. At this point they are legally barred from fixing your car or talking to you about fixing your car. 

 

All of the above is why I advise that you use the lemon law only as a last resort…the nuclear option. Put emotion aside and focus on what your purpose should be which is to have a car that you can drive without the problem that has been driving your crazy since you bought it. Your priority should not be to punish the dealer because as I already said, he suffers nothing from your winning a lemon law decision. You are punishing the manufacturer to some extent, but this is “business as usual” to all manufacturers who fight (and usually win) thousands of lemon laws annually. What I’m suggesting is that you might want to consider giving the dealer and manufacturer a little more time to fix your car after the first three attempts. If they look like they are sincere and trying hard, it could save you a lot of time driving your broken car (not to mention the mental anguish) compared to waiting months for the lemon law process to work itself out. 

 

I’m not saying that you shouldn’t tell the dealer and manufacturer that you will invoke the lemon law if you have no other choice. You definitely should do that. You should let both the dealer and the manufacturer know in no uncertain terms that you have meticulous documentation of their failed efforts to fix your car, you have familiarized yourself completely with the specifics of your state’s lemon law, and you will not hesitate to invoke it if you are left no other choice. This will instill a sense of urgency to fix your car ASAP if it’s within their abilities. The reason is the dealer and the manufacturer want to keep you as a customer. In fact, the dealer may stretch to give you a better deal on a new car to replace yours than you would ever otherwise have gotten. He can’t do that once the lemon law has been invoked because he would be trading in a “lemon”. A “legal lemon” has the same stigma as a flood car or totaled car that has been rebuilt. The manufacturer not only wants to keep you as a customer but wants to avoid the cost of arbitration (the manufacturer is responsible for all of the costs), the cost of disposing of a lemon, and the cost of the damage to their reputation by chalking up another lemon laws loss in the record books. For more information about the lemon law, Florida residents can call the lemon law hotline,800 321-5366 or you can click this link: http://www.myfloridalegal.com/lemonlaw.

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.

It's War! Car Dealers VS TRUECar

This is the second time that the car dealers have declared war on the online company, www.TrueCar.com. The last time was in 2011 when thousands of car dealers boycotted TrueCar to force them out of business. The U.S. Justice Department investigated this for being an “Illegal Boycott” and, as far as I know, it’s still under investigation. The car dealers were joined by their state dealer associations (well financed political lobbying groups). These lobbyists pressured legislators and state attorneys general to find legal reasons to stop TrueCar from doing business in their states.

The car dealers almost won the last war by depriving TrueCar of millions of dollars in revenue (TrueCar earns $299 for every new car sold through their referrals). TrueCar was losing money and almost went bankrupt, but Scott Painter, the founder and CEO, was able to negotiate a truce with the car dealers and their political lobbying groups. TrueCar began to grow very rapidly again. They signed up dealers very quickly because they were attracting millions of car buyers. They grew to about 10,000 car dealers and are selling about 5% of all the cars sold in the USA.

 You, the car buyers, love TrueCar when you experience their service. Why? Simply because they offer an honest, low price and a fast, pleasant car-buying experience. Car dealers make their money by negotiating (haggle and hassle) the highest price that they can on each customer that walks into their showrooms. You and your next door neighbor might buy the exact same car but your neighbor might pay thousands of dollars less because he was a better negotiator. In most dealerships no two people pay the same price for a car. Typically the disadvantaged in our society end up paying the highest prices which is most unfortunate because they can least afford it.

You might be wondering “If the car dealers hate TrueCar so much, why do they have 10,000 dealer members?” That’s a good question and the answer is that car dealers “see the handwriting on the wall” and know that TrueCar is the wave of the future. Only a limited number of car dealers will be signed by TrueCar and they are getting close to that limit right now. TrueCar will never sign up all of the dealers. They will sign only enough to have representation in all markets. Dealers have rushed to join TrueCar for fear they will be left out in the cold when most car buyers find out that the only sure way to get an honest, low price is through a TrueCar dealer. Most TrueCar dealers joined up because they feel they have no choice…they have too!

But, there is a hardcore group of dealers that HATE TrueCar intensely. These dealers are usually owners of a large number of dealerships or publicly held dealer groups like AutoNation. AutoNation was recently “fired” by TrueCar when they were caught cheating on the fees owned to TrueCar. AutoNation was not only cheating on payments but they were not providing the transparency in pricing promised by TrueCar. They were using TrueCar to attract customers expecting an honest, low price and then charging them more than the TrueCar price. When confronted with this, AutoNation refused to turn over their sales transaction data which would have proven TrueCar’s charges. AutoNation claimed this data was proprietary even though all other TrueCar dealers (including me) gladly provide it to TrueCar.

Car dealers that own a large number of dealerships are very wealthy; many have nets worth exceeding a HUNDRED MILLION DOLLARS. Dealership groups like AutoNation are also very flush with cash. There’s nothing plaintiffs lawyers like better than rich men and companies that are angry with, and/or feel threatened by, a competitor! Lawyers in New York and California leaped at this opportunity. Most lawyers don’t care whether their clients are right or wrong; they do care about how much money they can make. Smart plaintiffs’ lawyers ALWAYS structure their fees so that they get paid handsomely even when their client loses.

Lawyers in New York and California where TrueCar has the most dealer-partners knew a great opportunity when they saw one. Most of them were already lawyers for car dealers and knew how much their dealer clients hated TrueCar. Even though these lawyers, and likely the car dealers, knew that TrueCar was in the right and lawsuits would be judged without merit or even frivolous by the courts, they proceeded for two reasons. First, collectively, they have more cash than TrueCar and might be able to force them to settle favorably for the car dealers. Secondly, they might be able to drive down the TrueCar stock price. If they can accomplish that, other plaintiffs’ lawyers would join in the fray and file class action suits on behalf of TRUE stockholders. Their hope was that, by joining forces with the stockholder class action lawsuits, they could put TrueCar out of business.  TrueCar stock plummeted and they were sued in class action suits representing the stock holders. TRUE stock has plummeted from a high of 25 to $5.99  as I write this article. The further the stock price drops, the more incentive for more shareholder suits.

This is truly a “David vs. Goliath” battle similar to what Uber is fighting against the entrenched taxi and limo companies of the world. Uber and TrueCar both provide far better, less expensive, honest services for their customers, but they are outnumbered and out financed by entrenched old ways of doing business. Change is a very difficult thing to bring about. I believe that truth, justice, and transparency will prevail for TrueCar as well as Uber.

I urge you to join the fight on the side of TrueCar the next time you buy a car. Click on www.TrueCar.com. You will be offered a platform to specify the exact car you want. You will be shown the prices for that car in your market, not just your price but the lowest prices, the highest prices and the average price. You will then be given three certified TrueCar dealers in your market and three low prices. You will be shown all extra fees that they might charge like doc fees, dealer fees and dealer installed accessories. You select the dealer of your choice and before you even visit that dealer you have an “out-the-door” price plus government fees (sales tax and tag) only. If you encounter any problem with that car dealer, you can contact TrueCar directly at 1-888-TRUECAR and they will make it right. You can also call me on my personal cell phone, 561-358-1474.

Nobody Knows What Your Trade-in Is Really Worth

A lot of people think that all used cars have a specific value and they can learn this by looking it up in the “Blue Book” or some other used car wholesale book. Nothing could be further from the truth. The wholesale books that dealers use and those that are available online to consumers have varying degrees of accuracy, but you can’t rely on a book tell you the best price at which you can sell or trade in your car. The most accurate book is the Manheim Auto Guide because it’s based on the latest wholesale auctions nationwide and it’s updated weekly and daily online. The least accurate book is the NADA guide which relies solely on surveys sent to dealers. The dealers exaggerate the wholesale value of their make to make it easier to take in trades.

All of the wholesale books, except NADA, are based on prices of cars sold at auction. However, you must understand that those prices don’t give you an accurate price that you should expect for your trade. A car sells at an auction for the price offered by the highest bidder if the seller chooses to accept that bid. I often don’t sell my used cars to the highest bidder that week because I might get a much higher price the next week. Lots of things affect the level of prices at a car auction…the weather, holidays, bribing the auctioneer and bribing the buyers. On a cold, rainy day when few dealers show up to buy or sell cars, prices are lower as well as shortly before and after holidays. Sometimes it happens that a buyer “greases the palm“ of the auctioneer so that he “doesn’t hear” (fast gavel) the higher bid from another dealer who bids higher than the dealer who has let the auctioneer know the price at which he wants to buy the car. Sometimes the sellers pay the buyers cash under the table to bid an unrealistically high price for their car. A car doesn’t even have to go through the auction block for the owner to believe it was “sold at the auction”. Buyers and sellers can make a deal before it goes “through the block”…very cozy, only one bidder. Why would they do that? Often the buyers and sellers are employed by the dealer who actually owns the car. The used car manager or wholesale buyer employed by the dealer might pay $2,000 too much for a car if he can earn $500 cash in his pocket from the seller. His boss, the dealer, is never the wiser. Let me hasten to add that the Manheim auctions are very careful to police these kinds of shenanigans and never encourage them. However, as in every large organization (Manheim is the auto auction in the world), there are a few rotten apples.

OK, then if the books are wrong and the auctions are wrong, then surely the car dealer must know the value of my trade-in….WRONG AGAIN. I have a little “test” on used car appraisal knowledge that I administer to my sales managers from time to time. By the way, my managers are among the most knowledgeable and competent anywhere. This isn’t just my opinion but that of all of their peers in this market. My test goes like this. Without prior notice I randomly select a car from among the 100 or so that come into my service department each day. I ask each of my 8 mangers individually to appraise this car for what they think the current wholesale market value is. They keep their appraisal secret from the others and write it down on a piece of paper and hand it to me. I’ve been doing this for 30 or more years and I’ve never had a variance in appraisals of less than $3,000. Some have been greater than $10,000! The reason I do this is to remind all of my mangers of exactly what I’m explaining in this article….Nobody knows the exact value of a used car. That’s important to my managers because under appraising a used car can cost us a sale. Over appraising a used car can cost us a wholesale loss at the auto auction. Therefore we always check and recheck our appraisals and go so far as to call other dealers and even put cars on Ebay. Another good reason not to accept only one dealer’s appraisal is that dealers will often knowingly undervalue your trade-ink, especially if you’ve negotiated a very low price for your new car. The dealer vernacular for his is “stealing the trade”.

Now that we’ve established that nobody has any idea what your trade-in is worth, what does that mean to you? It means you should stop worrying about getting an accurate appraisal because there’s no such thing. However, what you should positively insist on is getting the highest appraisal. In fact, you should hope that the guy who gave you the highest appraisal was very inaccurate and made a huge mistake that will cost his dealership a large wholesale loss at the auction. You accomplish this by never accepting only the appraisal by the car dealer from whom you’re buying your next car. Before you allow him to appraise your car, you should get at least two other bids from dealers of the make of car you are buying. For example, a Ford dealer will usually appraise a Ford for more than a Honda dealer because more people wanting to buy a used Ford will shop the larger selection at a Ford dealer. Deal directly with the used car department at these other dealerships. Tell the used car manager that you need to sell your car for cash and that you’re getting two more bids from two other dealers. If you have the time to get more than two more bids it’s even better. Another good place to get a bid on your used car is from CarMax, the largest retailer of used cars in the world. They buy lots of cars directly from owners even when they don’t buy a car from CarMax. Their prices are sometimes higher than dealers will offer you.

After you determine the highest bidder, if it’s not the dealer from whom you’re buying, give him the right of last refusal. If he can match the price from his competitor, you save the sales tax on the price of your trade.

$100 for Information About Your Car Purchase

If you purchased your vehicle from an Autonation dealership through TrueCar in last six years, I want to hear from you!

I need to know:

1. Which Autonation dealership you purchased your vehicle
2. The date of the purchase
3. The make and model you purchased
4. The VIN of your vehicle
5. Your name
6. The sale price on your buyer's order

I will need to see copies of your deal paperwork - I promise to keep your name and information private. I will only furnish it to TrueCar so they can verify the transaction with Autonation. I will not use your information for any other purpose.

If you're not sure if your dealership was an Autonation dealership, you can check here

To say ""thanks for helping out with this, I'll pay you $100. I'm limiting this to the first 100 respondents, so hurry :)

Just email me at earl@earloncars.com to get the ball rolling!

Thanks!

Earl Stewart

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 accepts 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.

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.

Worthington/Quantum High Schools Commencement Address

 

My column this week is the commencement address that I delivered last Thursday, June 18 at the Worthington and Quantum High School of West Palm Beach graduation ceremony.  

I’m deeply honored to be asked to speak to you this afternoon. I do a lot of public speaking at civic clubs, churches and synagogues, libraries, and chambers of commerce. I do a live radio show every week with my wife, Nancy. Normally I speak extemporaneously. I’ve never written out a speech, and I rarely even use notes. But I have to confess, addressing a group of young women and men who will graduate from high school in a few minutes “scares me to death”. And, as you can tell, I’ve written out my words and I will read them to you. I want to be sure that I say the right things and give you the best advice I possibly can because you're beginning one of the most important phases of your lives.

When I was asked to speak to you, I was naturally very flattered, but I was also surprised. I wondered why I was chosen out of all the very qualified people that would be just as honored as I to speak to you. Then it came to me that I’m a successful businessman, a car dealer that is very different from most other car dealers. Not only am I different, but I’m far more successful than most other car dealers. But the reason I'm more successful is not that I’m smarter, or that I work harder or even that I sell a better product. I do sell a good product…Toyotas, but I also outsell all of the Toyota dealers in my market.

I haven’t always been different from all other car dealers; In fact for most of my career I was just like them. I started in the automobile business in 1968, long before any of you were born, and probably before most of your parents were born. I was successful for many years doing business just like all the other car dealers. The conventional, simple formula for success of car dealers was then, and still is today: (1) Advertise whatever it takes to lure prospective customers into your dealership. (2) When they arrive, do whatever it takes to sell them a car at the highest possible profit.

Back in the day when I was just like every other car dealer, I didn’t think I was doing anything wrong. There’s a sociological phenomenon that makes many of us think we’re doing the right thing because everybody else is doing the same thing. Two extreme examples of this are Nazi Germany in the thirties and forties and the Southern USA during the slavery era.

When we were kids, almost all of us used this excuse to our parents when we were caught doing something stupid like smoking or drag racing. “But, Mom…EVERYBODY IS DOING IT!” Then your Mom would say, “If everybody jumped off a cliff would you do the same thing?”

 I’m not really sure when I began to “see the light” and realize what I was doing was very wrong. It wasn’t an overnight revelation; it was more of an evolution. Twenty years ago, only one of my three sons had any interest in my business. The other two didn’t want to do what I did for a living. About that time I came very close to selling my business and retiring. Thirteen years ago my first (of five) grandchildren were born. About that same time, I married Nancy, the second marriage for us both. She loved the business and has taken an active role in it. A little over 10 years ago, I contracted colon cancer and thought I might die. These are “life changing events” in a person. My evolution from a “run of the mill” car dealer began back then. I began to “clean up my act”. I stopped my bait and switch advertising and I reformed from deceptive sales practices. My youngest son, Josh, and oldest son, Stu, joined me in the business. I remember one day my oldest son, Stu, told me that his children, my grandchildren, told him that they were proud of what he did for a living and that they would like to be car dealers one day. This had a very powerful impact on me and when I think about it today, it still brings tears to my eyes.

A funny thing happened as I began to treat my customer with more respect and integrity. My business began to improve. The customers that I sold for the first time began to come back again and again. They even told their friends and families. I was becoming more successful than I had ever been before. Suddenly it dawned on me! Being honest and respectful of others is GOOD FOR BUSINESS. Not only was I able to have my family with me, sleep better at night with a clear conscience, but I was making a lot of money.

I discussed this with my family and we decided to do what we were doing even better. Our company motto is “Kaizen” the Japanese word for “continuous improvement”. The next major step we took was to eliminate the “Dealer Fee”. The dealer fee also known by many other names like doc fee and dealer prep fee, is car dealers’ dirty little secret. It’s extra profit added to the price of a car making the customer believe it's an official state or federal fee. It’s the single most profitable component of most car dealers’ income. In my case, it amounted to about a $150,000 monthly. I was taking a huge chance by eliminating a source of profit that could literally bankrupt us. But, we agreed that if our goal was to be totally honest with our customers, the dealer fee had to go. Our profit per car did drop but the number of cars we sold increased so much as to offset the loss. Almost every car dealer in Florida and the USA, still charges a dealer fee.

Our next major step was to stop making high profits on those who could least afford to pay them, the less educated and sophisticated members of our society, and making low profits on those who are highly educated, shrewd negotiators. This is the hassle and haggle way of selling cars which is still prevalent today. For the past 3 or 4 years we have posted our lowest price on every car we sell. We encourage our customers to shop and compare our price with other dealers. Everybody pays the same price when they buy a particular car from us.

Another change we made was to offer unconditional money back guarantees on every car we sell. If a customer changes his mind for any reason, maybe they found a lower price or don’t like the color, we refund 100% of their money. No other car dealer I know of offers unconditional money back guarantees. On the contrary, most car dealers do everything they can to persuade you to take the car home the same day that you visit the dealership. “Taking delivery” is a vital component to making the car purchasing contract legally binding. It’s called a “spot delivery” by car dealers and most sell virtually all of their cars this way. You are rarely ever allowed to return the car and get your money back.

Our next change, in the spirit of Kaizen, will be to become the Amazon.com of car dealers. Very soon we will make it as easy to buy a car as it is now to buy flowers or a box of candy online. We will offer our customers the ability to choose their car, trade in their old car, and finance or pay for their car on their computer or smart phone. We will accept credit cards for a down payment or full payment and approve credit online for financing. We will send our appraisers to the customers’ homes to establish the trade-in value and we will also deliver their purchased car to their home. Our unconditional money back guarantee will take all of the risk and fear out of buying a car, even online.

I mentioned earlier that I do a lot of public speaking, just like I’m doing now. In recent years my role has changed from that of a car dealer to more of a consumer advocate. Because we’ve built the Earl Stewart brand so solidly to represent integrity to the car buyers of South Florida, I’ve moved to the “next level of trust” from a seller of Toyotas to an educator to buyers of all makes. In any business this is the highest level of trust attainable. I’m betting that you have a great amount of trust in your teachers that worked with you over the past twelve years to bring you to this great moment in your lives. Your parents also had a great deal of trust in your teachers in choosing this high school that you attended.

In addition to my weekly radio show and my regular speaking engagements, I write a weekly blog and newspaper column. I am looked upon by the local and national media as a source of candid, truthful information about the retail auto industry. I’ve been quoted by the Wall Street Journal, USA Today, CNN, Fox News, US News and World Report, Fortune Magazine, Forbes and many local medium. I’ve written a book, Confessions of a Recovering Car Dealer, that I sell on Amazon and I donate 100% of the proceeds to charity. In fact, tonight, as a graduation present to each of you, I will give you a copy of my book. Just email your address to earl@earloncars.com and I will mail you a copy of Confessions of a Recovering Car Dealer.

So, you might ask, what has all of this got to do with me? What it has to do with you is that I’ve shared a “secret” with you…a secret that is “hidden in plain sight”. You’re mother always told you to be a good person, "do unto others as you would have them do unto you", "never say anything about anybody else unless you have something nice to say", "honesty is the best policy", don’t be a bully, and so on. We see and hear this advice often and from an early age, but what we don’t see is the majority of people around us, friends, family, and most others, following all of this advice themselves. You can compare this to the speed limit signs on I-95. Everybody sees and understands their meaning all the time they are driving, but very few pay any attention including the Florida Highway Patrol. J

 The reason that you don’t obey the speed limit is that you want to get where you’re going faster and you know that if you exceed the speed limit by just 5 or 10mph, you won’t be issued a ticket. You also notice that everybody else is exceeding the speed limit and they aren’t being ticketed either. In fact, your trip is actually smoother if you stay in the flow of traffic. If you slow down, other drivers continuously pass you and some might tailgate or even blow their horns.

But what if, counter intuitively, you discovered that, for whatever reason, you actually made better time by rigidly obeying the speed limit? Do you see where I’m going with this? I discovered, almost by accident, that all other car dealers were doing it wrong! And remember, this phenomenon isn’t confined to only car dealers. This applies to all businesses everywhere.

 This is because the world is changing at warp speed. At the end of WWII, human knowledge was expanding at the rate of doubling every 25 years. Remember that in 1945 we had no computers, no Internet, and there wasn’t even any television. Today the sum total of human knowledge is doubling every 12 hours and that rate is accelerating as I speak! Today, the smart phone you hold in your hand has more computing power than was available to the President of the United States twenty years ago!
\Some of you will be going on to college next and some won't, but all of you will be looking for a job at some point. You might be tempted to take job with the company that offers or promises you the most money. You must overcome that temptation because, in the long run, very few 21st Century companies will prosper without transparency and integrity. This is because of the "knowledge explosion" I've told you about. Today's consumer is far smarter, more sophisticated, and more demanding than the consumer of just a few years ago.

My advice to you is to look for a company to work for that believes, understands, and applies the "secret" that I've shared with you this afternoon. Good companies always try to hire good people. That’s what makes them good companies. In your job interviews let them know that you strongly believe in total transparency and honesty and that you chose their company because they have that reputation. It goes without saying that a strong work ethic, high energy, and a good education are prerequisites for most jobs. But, what will make you stand out from the crowd at a good company is your ability to fit well into their culture of transparency and integrity. 

Thank you for honoring me by asking me to speak to you today. Good luck and God bless.

Don't Get "Flipped" to a Lease

One of the most popular weapons in car dealers’ arsenals is the infamous “lease flip”. This is car dealer jargon for switching a customer who originally intended to buy a car to leasing the car. 

Of course the motivation to do this is more profit for the dealer and a bigger commission to the salesman. That’s not to say that leasing a car is always more costly than buying one, but it can be if you’re not careful. And not being careful is exactly what happens when a purchase intender becomes a lessee. 

Here’s how it happens. You come into the dealership to buy a car. You may have seen the dealer’s advertisement in the newspaper or TV for a particular model. More than likely you are prepared to make a down payment and/or trade in your old vehicle. You have a monthly payment in mind because almost everybody has a budget and we usually translate most purchases into whether or not we can fit them into our monthly budgets. You negotiate the best price you can to buy the car, or maybe the sale price is good enough. 

Now the salesman or more often the F&I manager/business manager tells you what your monthly payment will be. Let’s say that you have a trade-in worth $15,000 and aren’t going to put any cash down. The F&I [Finance and Insurance] manager tells you your monthly payment will be $427 per month. But that’s way more than you can afford and you tell him you can’t buy the car because you can’t afford that big a payment. He asks you how much you can afford and you tell him it must be under $350 per month. Now he has you set up perfectly for the “lease flip”. 

“Mrs. Smith, I think I have just the right thing for you. What would you say if I told you that you can drive that new car home today for just $349 per month?” You say, “With glee, you say we have a deal!” Guess what? You’ve just been flipped. If you had bought the car at the advertised price or negotiated a very good price, the dealer probably would have made about $1,000 profit. and the salesman would have made about a $200 commission. Not that you’ve let yourself be flipped to lease, the dealer could be making $15,000 and the salesman could be making a $3,000 commission!

I’m not exaggerating. I get calls weekly from victims of lease flips. Many of the callers are elderly and many of them are widows who never bought a car before, but had relied on their husbands. There’s no law that limits the profit that a dealer can make when he sells or leases a car. $10,000, $15,000, and even $20,000 profits are made and usually on leases. The dealers can do this by using the trade-in as a capital cost reduction on the lease but allowing less for the trade than it is actually worth. In the example above, your trade-in may be worth $15,000 but you were allowed only $5,000 to reduce the capitalized costs of the lease. Also, the dealer could have raised the price of the car you negotiated or the sale price to MSRP or even 110% of MSRP which is allowable by the leasing companies. 

By manipulating the number of months of the lease and the down payment [capitalized cost reduction], a dealer can give you as low a payment as you ask for and still make an exorbitant profit. Most buyers are so focused on monthly payments that they don’t carefully analyze what they are agreeing to and signing. The shorter the number of months of a lease, the greater impact the down payment has on the monthly payment. A $5,000 down payment reduces the monthly payment on a 36 month lease by $139 per month, $208 on a 24 month lease, and $417 on 12 month lease. 

Incredibly many victims of the lease flip, never thought about the fact that after the 12, 24, or 36 month term of the lease, they own nothing. After 36 months, a car with a good resale value should be worth about half of what you paid for it. Many people who have never leased before think they can bring their lease car back early if they want. Leasing is not renting and you can bring your car back early only if you make all of the remaining lease payments. If you had bought the car for $30,000 and financed it for 36 months, you would have about $15,000 in equity at the end of 36 months and no monthly payments. You were building equity with every monthly payment in the purchase but you were building zero equity with your 36 lease payments. 

As I said before, don’t let this frighten you from ever leasing a car. Leasing can be a good choice and sometimes the best choice. You can find six articles I’ve written for Hometown News: “Lease a New Car before You Buy It”, “Car Leasing Booby Traps”, “Be Very Careful When Leasing a Car”, “The Lease Acquisition Fee…the Bank’s Gotcha”, “Buy or Lease Your Car at the Right Time of Year”, and “Should I Buy or Lease My Next Car?” 

TrueCar and Tesla: Car Dealers' Worst Nightmares

If you want to know who car dealers dream about at night and wake up screaming about, their names are Scott Painter and Elon Musk. Scott Painter is the founder and CEO of TrueCar and Elon Musk is the CEO of Tesla.

What these two men have in common is an understanding of why most Americans distrust car dealers and why they consider today’s car buying experience unpleasant and even fearsome. Scott Painter and Elon Musk also have a vision for how this can be changed and both of their companies are moving rapidly to do so. They also have something else in common; they are two of the smartest, most honest people I know.

These men and their companies both have the same goal which is to bring total honesty and transparency to the car-buying experience, but they have chosen different paths to accomplish their goals.

Elon Musk and Tesla are lobbying state legislatures and federal agencies to allow Tesla, an auto manufacturer, to sell cars directly to the consumer and by-pass franchised car dealers. Some states have already complied and the U.S. Federal Trade Commission, FTC, has sided with Tesla, and is “strongly recommending” that all state legislatures pass legislation allowing direct sale of automobiles by all manufacturers. 

During the early part of the twentieth century privately owned franchised car dealerships were a rarity. Gradually car dealers were able to lobby all state legislatures to pass law making it illegal for a manufacturer to sell cars in their states and requiring that all cars be sold through private dealerships that were franchised by the auto manufacturers. The dealer franchise laws also prevent manufacturers from adding “too many” car dealerships in a given market. These same laws make it very difficult for a manufacturer to cancel a dealer’s franchise. Unless a car dealer commits some very egregious act, like committing a felony, manufacturers have a very difficult time doing anything to replace him. Car dealers make a lot of money and they form associations that are essentially lobbying organizations to maintain the status quo.

Elon Musk’s task is not an easy one. The car dealers and most politicians are and will continue to vigorously oppose him. But he does have a strong trump card which is the “American car buyer”. The Gallup Company has been conducting an annual poll on “Honesty and Ethics in Professions” for 37 years. Car dealers have ranked either dead last or in the bottom three since the poll began. They have shown no improvement. They are frozen in the 1950’s ways of bait and switch advertising and deceptive sales practices. There is no question that, if there were a national referendum vote on whether car buyers should be allowed to buy their cars from other than a franchised dealer, it would pass overwhelmingly.

As you probably know, I am a car dealer and I have been one since 1968. My father started in the retail car business in 1937 and I joined him at his Pontiac dealership in West Palm Beach. My wife and I are still involved in our Toyota dealership and my three sons will continue to operate it, hopefully, for many years to come. I would like to obtain another one or two car dealerships for my sons. Clearly, I do not look forward to the demise of the auto franchise system, but I clearly do understand why this could happen.

Scott Painter offers an alternative to Elon Musk’s goal to eliminate franchised car dealers. His company, www.TrueCar.com, offers a far superior, safer, totally transparent and less expensive way than buying a car directly from a car dealer. TrueCar has established firm rules for car dealers to abide by, if they want to become a Certified TrueCar Dealer. These rules include posting a firm out-the-door price without “surprises” like dealer fees, doc fees, and dealer installed accessories. This affords the TrueCar buyer the ability to compare out-the-door prices with at least 3 certified TrueCar dealers. TrueCar also offers unique and invaluable data to their buyers on what the real transaction prices are for the exact car they wish to purchase in their market. This data is obtained directly from the computers of over 10,000 TrueCar dealers. A potential buyer of a Ford F150 can see the lowest price, highest price, and average price that this vehicle has sold for recently in his market. The buyer can compare these with the prices quoted by the TrueCar dealers as well as MSRP and invoice….TOTAL TRANSPARENCY.

About 30% of all U.S. car dealers are Certified TrueCar dealers. Dealer who won’t comply with the rules are “fired”. Last year TrueCar fired 275 dealers. Customers who have a complaint about a TrueCar dealer can complain directly to TrueCar and they resolve all complaints. There has NEVER BEEN A LAWSUIT AGAINST TRUECAR BY A CUSTOMER since they started in business ten years ago.

There are lawsuits against TrueCar from car dealers and car dealers’ lobbying associations. There is even an effort to certify a class action suit purportedly on behalf of TrueCar stockholders. This is because the other frivolous lawsuits by the car dealers and their associations have driven down the TrueCar stock price. It’s my personal opinion that Wall Street short-sellers are behind this lawsuit. In full disclosure, I own TrueCar stock and I am buying more because I firmly believe TrueCar is the wave of the future in the way that cars will be bought in the USA. I am also a member of the TrueCar national dealer council and a certified TrueCar dealer.