Before you shop for or buy a used car from a dealer, you should understand a little about how a car dealer arrives at the price he puts on the sticker.
To a dealer, a used car sitting on his lot with a price sticker on it represents cash that needs to be collected. You can bet that he’d like to see that cash sooner rather than later because, in most cases, the money he spent to buy the car is a bank loan on which he’s paying interest each month.
When it comes to putting a selling price on the car, the dealer has to begin by determining his out-of-pocket costs :
● First, there is the price he paid to acquire the car. He might have taken it in trade against a new car – which means that he accepted the car instead of cash – or he might have purchased it from a private seller, a wholesaler or bought it at auction.
● Second, he will add what it has cost him to repair and recondition the car.
This might include bodywork, new parts and detailing.
● Third, if he is a good businessman, he’ll factor in such items as loan interest, the commission he’ll have to pay the salesman, insurance and other operating overhead expenses.
With his current and projected costs in hand, he will then decide how much markup to include in the selling price. The amount of the markup reflects the condition of the car, the make, model, mileage, options and, most important, the market demand. Many dealers will also include a “negotiation pad” in their mark-ups. They recognize that most people won’t buy a car – new or used – unless they feel they’re getting a deal and buying it for less than the advertised price. So a dealer will build in a large enough cushion to give the buyer a discount and still end up with whatever he considers being a reasonable, or maybe even a more than reasonable, profit.
How Much Will A Dealer Negotiate ?
Assuming that the car is not a hot, one-of-kind model in high demand, there’s usually plenty of room for negotiation. If the car has been on the lot more than a couple of months and demand for the make or model is low, he may be willing to sell it well below his asking price. However, there is a price beyond which he will not go. That price is what he knows – based on market reports – that similar cars are selling for at auction. A dealer never wants to have more cost in a used car that he knows he can recover should he have to sell it at auction. That’s why trade-in quotes are always made with an eye on the current auction prices. That’s also why many trade-in quotes are below the going auction (or wholesale) prices. Dealers are always looking to buy low and sell high.
The Number You Need to Know
Clearly, in planning your negotiation strategy, your objective is to discover what cars like the one you’re considering are bringing at auction. It’s the auction results that, in large measure, set the wholesale price of a used car. If you take the wholesale number, add – at the very most – $1000 additional dealer costs and then subtract it from the asking price, you have a pretty good idea of the dealer’s markup. From there, you can decide how much profit you’re prepared to let the dealer make on the sale. (Oh, how dealers hate it when the customer decides to determine the profit on a car.)
Some Real-World Examples of Used Car Pricing
Recently we saw a GM car that had been purchased by the dealer at auction for $8,500. After spending $400 for repairs and reconditioning, he put it on the lot at $13,995. That’s a markup over his cost of nearly 60 per cent. A buyer negotiated the price down to $12,400. The customer felt he’d made a good deal and the dealer, with $3500 profit in his pocket, said nothing to disabuse him of that notion.
A sales manager dealing with a uninformed customer gave him $22,900 for his late model, luxury sedan trade-in. The actual wholesale value of the trade – per the auction reports – was approximately $27,550. Two weeks later the trade-in, all shiny and clean, was on the dealer’s used car (excuse me, preowned) lot with an asking price of $34,995. Now you know why the used car lot – along with the service department – is where dealers make most of their profit. (It certainly isn’t in the new car end of the business. But that’s a subject for another article.)
How to Determine the “Wholesale” Price ?
Now you understand why knowing the current wholesale value of a used car – whether buying or trading-in – is one of the most important pieces of information you can have. One source of this information is the car loan department of your bank. They will usually have all the latest price books and possibly even auction reports that show what various makes are bringing on the auction market.