Sun, 25 Oct 2009

How to Buy A Car

We bought a car this weekend, but before I give you the details, I realized I should write this blog post first.

The first thing to know is that knowledge is power. There were many sources I relied upon, but a few key ones are worth mentioning. First, I relied on Consumer Reports to provide invoice and holdback costs. These are what the dealer was charged to take inventory of the car, and how much the automaker will compensate the dealership for selling it. The cost of each report is about $12-14 (depending on how many you buy) and they're fully worth it.

Consumer Reports lists each one of these details, which means you can walk into the dealership knowing exactly how much the dealer's cost is, and negotiate up from there, as opposed to negotiating down from the MSRP.

Second, I relied on the automakers' websites to familiarize myself with the models, packages, and options on the car. Consumer Reports provides this also, I suppose, but the "build your own" option on carmakers' sites helps with dependency and conflict resolution (not all options are available on all trims).

Third, I relied on, specifically, to get the residual values to determine just how quickly the amount paid on any particular car would depreciate.

Fourth, I relied on to get "true cost of ownership" values to determine what other costs are likely to rule the roost.

Since Christine and I could technically afford a much more expensive car, we were looking at a broad range of vehicles, from MSRPs as low as the 30's to cars whose MSRP is in the 60's. What was key was that we were buying safety, quality, and that the money we spent for that safety and quality didn't erode over time, so in that sense, we were value shoppers. And of course, the car simply had to "feel right" and so fit, finish, and comfort were also key factors. Outside of that, we looked at well over 50% of every brand and segment on the market.

Having done our finger-research (online) and butt-research (test drives) we narrowed the field down to a few, and pulled the CR new car reports which immediately gave us a sense for how much to negotiate. Once you find the car you think you want, make a note of all the options on the car (I called the dealership and asked for all the options of the car they had on the lot I was interested in-- it helped that there was just one-two cars on the lots I called).

Then, run a spreadsheet adding up the invoice prices, and subtracting away the holdbacks and marketing incentives. Add the transportation fee, marketing/advertising expenses, and various fees/expenses the dealer is likely to charge, and add a few hundred dollars of profit for the dealership, and you've got your offer price.

This will often be too low, and the dealer will try to talk you up. Listen to their rationale, and make your decision on whether or not the prices seem reasonable. I paid roughly $2K over my initial offer price, but $12.4K lower than MSRP. Another reason to bargain up from the invoice, holdbacks, and incentives rather than down from the MSRP!

Here's an example. These are actual numbers that I pulled, except I multiplied by a mystery factor and with a few numbers changed here and there, so as not to give away what I bought or to diminish the value of the CR data by publishing it. As I said, if you're buying a car, spend the $14 to get your own. It's totally worth it!

MSRP: $34xxx
Dest. Charge: $700

Marketing Support: ($x,000)
Dealer Holdback: ($1,144)

Luxury package: $3,980
Metallic Paint: $535
Premium Audio: $781
Wiring for Entertainment: $111
Heated Seats: $535

Subtotal: $42,096
Subtotal (minus incentives) $3x,952

Dealer profit: $500 (how generous are you feeling? What's a reasonable profit so the guys can be there when you need service?)

My Offer: $35,452

This price will need to come up, for various fees and costs, such as advertising support that regional dealerships pool to run the ads you see on TV, for their costs to prep and detail the cars, and the amount they pay to the bank to take inventory of the car (banks hold the ownership interest in the car, and the dealership pays the bank the monthly interest for each car in their inventory... So their inventory costs are just the interest on the car rather than the whole vehicle cost). Also, some dealerships, primarily the premium marquees, resist strongly to eat into the dealership holdback. They figure that a richer guy who cares less about the cents on the transaction will buy the same car you're negotiating for.

Finally, you need to take into account your trade. Before talking about the trade, make sure you finalize the offer on the car. When given an opportunity to tie the deal together, they'll find a way to inflate the price on the new car to compensate for your perceived value of the trade-in. Finalize the price on the car, then negotiate on the trade. If they won't go up any more on the trade, take the purchase without the trade, accept the offer, or walk away.

Of course, here again, knowledge is power. Do a search against sites like, where auto wholesalers bid for these cars. Pull NADA values (or simply ask for it) and KBB figures, to figure out, what is the actual trade value? Our car was in excellent shape, so we got top dollar for our car. (It also didn't hurt that we knew exactly what was a reasonable price for the car since my brother-in-law got us the numbers-- he's a wholesaler who brokers cars for a living).

What you'll end up paying is, of course, higher than just the offer price minus the trade. First, you'll only pay sales tax on the difference between the offer and the trade. So it also helps, if you want to know, to the closest dollar, how much you're likely to pay, know the sales tax rate of the city you're buying in. You'll also have to pay title/registration. Armed with this information, you'll know exactly how much you'll need to pay down in cash, or finance.

Armed with this bevy of information, you'll be able to rest assured just how much the dealership is making, and frankly, how much you're saving or not saving on the deal. And, if the prices just aren't coming down far enough, you can just tell yourself, "well the price I'll likely be able to negotiate at Ford will be better than this based on my research, and while I like this Escalade more than the Explorer, I don't like it $10,000 more!" and begin to walk out. When you're prepared to walk out to get a better deal elsewhere (and know you can get it!) that's when the dealership has to bargain.

Name/Blog: Khan
Title: Clarification
Comment/Excerpt: Christine pointed out that I almost make it sound like the figures in this post are real. They are not. I tweaked the real numbers beyond recognition and didn't specify which car this was, and renamed option packages. For illustrative purposes only!!

Name/Blog: Rus
Title: great post
Comment/Excerpt: This is great stuff. Keep that spreadsheet around... I may need it when Berkeley turns 16 for my next car purchase (in 8 years time). ;) cheers. --rus.

Khan Klatt

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