It’s Not Hard To Buy a New Car

By Eric Peters, Automotive Columnist

Assuming you have the money, buying a new car has never been easier — or less stressful. If, that is, you aren’t still buying cars the way people did back in the ’90s . . . before the Internet.

The ‘Net has made it simple to do almost everything you need to do except sign the papers and pick up the keys without ever leaving your home and — most important of all — without ever having to deal in-person with salesmen.

Here’s how:

First, figure out exactly which new car you want to buy. Not merely the make and model — but also trim, color, engine/transmission, optional equipment — and so on. This information will enable you to “build price” the specific car you want, with the equipment and features you want.

Next, price it.

The starting point is the manufacturer’s suggested retail price — the MSRP, or “window sticker.”

The MSRP is the profit-padded price the dealer hopes he can sell you the car for. It does not reflect the dealer’s cost to purchase the car from the manufacturer. Dealers are independent franchises; when you buy a new Ford, you are not buying the car from Ford Motor Company; you are buying it from a Ford dealer. The dealer paid less for the car than MSRP. This lesser amount is the dealer invoice price — and it should be the starting point for your calculations — and subsequent negotiations.

How does one find the dealer invoice vs. the MSRP? A few strokes of the keyboard is all it takes. Sites such as kbb.com and edmunds.com (and many others) publish MSRP and dealer invoice prices for most new cars.

Best of all the info is free — my favorite price.

Jot the number down on a pad.

Next, you’ll need to price the options (if any).

Just as the car itself has both an MSRP and a dealer invoice price, so also the optional equipment. Scan the window sticker and you will see things like GPS or a sunroof itemized (some a la carte, others listed as part of a package that includes other equipment) with the “suggested” price added to the car’s bottom line MSRP. In fact the actual cost — to the dealer — of these options (like the cost of the car itself) is also less than stated on the window sticker.

You want the invoice prices for these options — also available on the sites mentioned previously.

Now add everything up — twice. One column for the car at “sticker” price — the other, dealer invoice price.

To give you a sense of the difference between MSRP and dealer invoice, let’s consider a current (2014) model year new car as a case in point.

The Nissan Versa Note I reviewed a couple weeks ago (see here for that) has an MSRP of $13,990 in base (as it sits, without optional equipment) “S” trim. The dealer invoice for this car is $13,500 (see here for the details). The optional Sport package — which includes an upgrade 15 inch wheel/tire combo and a decklid spoiler) adds $760 “sticker” (and $637 dealer invoice) to the price. An Interior Illumination Package adds $455 MSRP ($340 invoice). There is also an $810 destination fee — which covers the cost to ship the car from its assembly point to the dealer. This fee, incidentally, is what it is — there’s no MSRP vs. invoice price; however, that doesn’t mean it can’t be negotiated. More on that in a moment.

Ok, let’s add ’em up.

Equipped with the options listed above — plus the $810 destination fee — the MSRP window sticker of our 2014 Versa Note will come to $16,015 — vs. a dealer invoice price of $15,287. The difference comes to $728, or roughly 5 percent — which represents the nominal profit to the dealer if you bought the car at full MSRP.

However, even the dealer invoice price is — frequently — to some extent padded by manufacturer-to-dealer incentives (e.g., “holdbacks”) such that the actual profit he stands to make on the car — if you paid full MSRP — could be closer to 8 or even 10 percent.

Your object should be to buy the car for about 3 percent over invoice. This represents a fair deal for both parties.

Not too much for the dealer — not too much from you.

Now, armed with info about what the car (roughly) cost the dealer — and knowing about what it ought to cost you — it’s time to go shopping.

Via e-mail.

If you are shopping for a Nissan Versa, as in our example above, you’ll want to make a pitch to all the Nissan dealerships within whatever seems to you to be reasonable distance from your home. Because eventually, you will have to go the dealer to sign the papers and pick up the car. But don’t limit your inquiries to just the one or two dealers that happen to be close by. Keep in mind that any Nissan dealer (or Ford or Honda or whatever) dealer can handle warranty claims if they should arise — and can certainly provide factory-authorized service. You do not have to have the car serviced where it was bought.

Now, it’s certainly nice if you can buy the car from a dealer that’s 10 minutes down the road — but there’s no reason to limit your search to┬ájust that dealer, especially if another one offers you a better deal on the car. Which will often be the case. A dealer in a rural area, for instance, may be hungrier to close a deal than a dealer in an urban/suburban area where there’s a lot of floor traffic. If you can save $1,000 (or more) on the cost of the car, wouldn’t it be worth a two hour drive?

Most dealerships have web sites — and publish contact info for their sales staff. Contact them — via e-mail. Write a brief note explaining that you are interested in buying (again, using our example car) a new Nissan Versa, list the specific trim, features and options you want, along with the color — and the price you are willing to pay. Tell them you’re ready to buy; you’re not “just looking.” Tell the salesman you’re prepared to come down and buy the car today. . . at that price . . . and that if they are agreeable, to contact you right away. Make it very clear, however, that you are not interested in making the trip down to the store to talk — much less haggle — and that if you are lured there on false pretenses, you’ll turn around and walk out the door, never to return.

Send the same e-mail to salesmen at the other Nissan (or whatever the make happens to be) dealerships. Let each know you’ve contacted other dealers and will say “Yes” to the first salesman who accepts your offer.

Then, sit back and wait for your In box to jingle.

It shouldn’t take long.

Excepting exotics, high-end cars and a few trendy-for-the-moment cars, most dealers want to clear inventory as quickly as they can, so long as a reasonable profit can be made on the deal. Three or so percent over invoice is a reasonable deal, no matter how much of a show the salesman might put on for your benefit.

Now all you’ve got to do is sign the papers — and drive your new car home.

A few more tips:

* Always negotiate up from the invoice price — not down from the MSRP sticker price.

* Be sure to research — and factor in — rebates and cash-back offers. As an example, Chrysler Corp. recently offered a $2,000 cash back deal on the 2014 Dodge Dart sedan.

* Your haggling position will be stronger if the model you’re trying to buy is not extremely popular (for instance, a Prius hybrid) or “new” (like the new Corvette Stingray). For the best negotiating position, shop for a car that’s more or less the same this year as it was last year (what’s called a “carryover” in the industry) or a model that’s scheduled to be significantly updated next year. Dealers will — usually — be eager to get rid of their stock of “old” models in order to make way for the “new” ones.

It’s easy enough to find out what’s popular (and not) and which models are “carryovers” — or scheduled to be updated — via your computer. Just Google around. Read the new car reviews (reviewers will almost always mention whether the car being reviewed is about to be updated — or has just been updated) and scan sites such as KBB and Edmunds, which publicize what’s new — and what’s not.

* Line up your money first. Don’t offer to buy a car you haven’t lined up financing for — or can’t afford to just cut a check for. Dealers hate tire-kickers. If you’re ready to buy — be ready to buy.

* Be sure that “extras” you did not agree to in your offer are not included in the paperwork when you go there to do the deal. This would include “prep,” “advertising fees” or (and this one’s pretty brazen) “additional dealer mark-up.” Be ready to walk out if they spring any of that on you. The only extra costs that should be added to your final tab are applicable sales and title taxes — and you should double check rates with your local government/DMV to be sure the dealer hasn’t padded either of them.

Finally, don’t sign anything until you understand everything. Do not let yourself be pressured. It’s your money — take your time. Be sure.

Then, be happy!

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20 Responses to “It’s Not Hard To Buy a New Car”

  1. rt says:

    Could you, if possible elucidate on the different selling services, like Costco, AAA, USAA, etc.
    What are their advantages if any and which one is the best?
    Thanks…

  2. FC Bock says:

    I'd prefer to make an "out the door" offer. Then extra costs wouldn't be an issue at the time of signing. If there are any, no deal.

  3. John Seiler says:

    Are factory-installed security systems worth it? I got one because the dealer said any other security system installed later would void the warranty. True?

    (I once had a car stolen, which I don't want to happen again.)

  4. William Lee says:

    Please explain how you think a 3% margin is enough to fund a dealership. Please take all the space you need.

    I am not a dealer, never have been, but I really don't think an 8% markup is that horrible. From an economic standpoint, though I just don't see how a dealership can run a a couple hundred dollar profit. I know a dealership nearby, they have five sales people. Each sells ~10 cars a month, the average, they tell me. That's 50 cars a month, times 100 dollars, that's five thousand dollars a month. How does that pay for a rent (typically 10,000.00 a month) salaries (For five, at 50K per, $20,000 a month) Electricity ($2000.00 a month) etc using your profit model?

    • The Bobster says:

      The dealerships make the bulk of their profits from used cars and auto repairs. New car sales just cover the overhead.

  5. George says:

    What about items like dealer office fees? Many times if not every time, there is a pre-printed amount on the contract of $700 that is not "negotiable". Is it negotiable?

  6. Fred says:

    Eric, should a buyer be trying to dig into the "holdback" to lower the price? And is there a way to determine how much they are?

  7. Steve says:

    I have found in the almost 50 years of being a car nut & buying cars: luxury, exotic, and practical, for fun & for work, that I much prefer working with a well established dealer & salesperson.

    That is not to say that checking venues like the USAA prices & options aren't helpful, but this is a relatively new tool.

    & I'm not saying that one shouldn't be as well informed as possible; however, I am amused at folks who will spend a thousand dollars worth of their time to save a few hundred bucks. In our state, we pay sales taxes based on county & city. I actually had a friend who, based on my estimate, spent hundreds in time, gas & headache, etc. to save less than a hundred bucks by buying from a dealer with a more favorable tax. I wasn't surprised that the car was a disappointment – karma. I couldn't enjoy life being such a miser. I prefer to spend the time sailing, or being with the family.

    To rt's query: I have been a policy holder with USAA for almost 50 years. I find their site to be very helpful in the last 3 purchases I made. However, in our area because it is very competitive, the dealers frequently offer the same, or better, prices. Besides, if you have your eyes set on something hot in the BMW, Audi, MB, etc. Pho-get-abowd-it!

  8. Libertarian says:

    You left out something important! The "dealer cost" listed is NOT the real dealer cost. This is from Edmunds:

    Invoice price (sometimes referred to as "dealer cost") is the price that appears on the invoice that the manufacturer sends to the dealer when the dealer receives a car from the factory.

    Please note, however, that this price is almost always higher than the amount the dealer actually ends up paying to the manufacturer. This results from a variety of discounts offered to the dealer that do not appear on the invoice. The two most common discounts are Dealer Holdback and Dealer Cash Incentives, and there are others that may be based on factors such as a dealer's sales volume for a particular month.

  9. tbiggs says:

    Exactly, this is what savvy people have always told me. "Out the door price" means exactly that. Make it clear at the very beginning of the conversation that this is the only number you want to talk about. Not MSRP, not "monthly payments", not some supposed agreed-upon price that is subject to extras. Say "Out the door price" early and often, and when the negotiation appears to be done, double-check that this is still what they intend to sell it for. As you said, if the price is higher when you get there, walk out.

  10. Charlie says:

    I commented here on how to do this over a year ago, and I have actually used this method buying 3 new cars. You have one part of the system wrong tho: you do not need to know anything about MSRP or invoice or any other such nonsense. What you do when you know what car with what options you want is that you get the emails for ALL that car's dealers within about 25-50 miles. I did this for a Mazda, Nissan, and Toyota. I live in Dallas, TX so there are 10-15 of each of those car dealers around here. You send an email to ALL of the dealers asking for a price for that car with your desired options. Once you get a reply back with a price you then email that to all the other dealers asking them to beat it. You continue this process until all the other dealers say they will match a price, but cannot beat it. This is when you know that you have the best price possible. Oh yeah, do not forget that you should ONLY ask for the total out the door price including tax, title, license, fees, paperwork, etc, etc….. That is the only price that matters.

  11. Fred says:

    I've spent decades both as a new car salesman as well as an F&I manager. And I have purchased new cars with this method for decades as well. Before the data was readily accessible on the internet, I'd just go into to the dealership, explain what I want and how the deal would go (to trade or not, to finance or not, how much down, and term); and then I'd ask to see the new vehicle's invoice. I know how to read them so I could see the coded holdback right on the page. I usually offered the dealer $300 over invoice, and ask them to split the holdback with me 50-50. I was politely throw out of about half the dealerships I went to, but I always got the deal I wanted at one of the other stores that found a quick and simple deal like the one I was offering acceptable. Now it's much easier, and I've been doing it all over the internet for a long, long time, exactly the way that Eric explains here. An for other commenters here who speculate on any dealerships' ability to stay in business on such narrow margins as Eric recommends here, I know that dealerships make money in all departments, many time way more in service than in sales anyway; and that they average profit over many sales, not just the small minority of them that are purchased via those espoused here. It has amazed me for decades that consumers spend less time and effort planning their new car purchases, then they do for a typical vacation.

  12. David says:

    Excellent article! Your last point is spot on – I know a woman who got conned because she bought a car based on finance cost. They bumped up the loan period by one year, without telling her.

    • Fred says:

      David, we in the car business are trained that there are four basic types of vehicle buyers: those who are primarily concerned with (1) their trade value, (2) the difference figure after a trade allowance, (3) the bottom line for cash buyers or those with no trade, and (4) payment buyers, who are primarily concerned with what their monthly payment will be.

      The vast majority of American buyers fit in the last category, and unfortunately, because of that, they are the easiest for dealerships to take advantage of financially.

      One excellent car buying educational website that I have been referring customers to for years is carbuyingtips.com. There is a free to read 10-or-so chapter book there on how to buy cars. I suspect that those consumers who will bother to read it will then know as much if not more about the entire car buying process, than many car saleman!

  13. Jon says:

    Your math doesn't add up on the sales side. $100 revenue per sale at 3% is a 3.3k car. Most new cars are 10k and up. Assuming 20k as the nominal new car sale is $600 revenue, excluding the dealer holdbacks which according to Eric's article can boost the sales percent 2-5% extra. So this puts revenues for 50 cars a month between 30-60k which is say would support your dealership

  14. Keith Hamburger says:

    3% is not $100. On an average car it is more like $1000. (Car runs around $30,000, 3% is $900.) 50 cars at that would easily cover the costs you cite. And leave a substantial profit to the owner/investors.

    And don't let the dealers fool you that they have $30k into a car. They all use flooring (financing) to maintain stock. If they're paying 12% annual interest it costs them 1% of the invoice price per month. If a $30k MSRP car invoices at $27k, it costs them $270/month to keep that car on the lot. If they sell a factory order it effectively costs them nothing. If you take a car out of inventory you're doing them a favor by lowering their costs. If they've held on to a car for more than a month in inventory that shouldn't be the buyer's problem they made a mistake in ordering a product with no demand.

    Keith

  15. Keith Hamburger says:

    And, I checked the number I tossed out there. Pretty close to exact … http://www.autoblog.com/2012/04/11/average-price-

  16. Keith Hamburger says:

    So, 50 cars, $15k/month inventory cost. Overhead of say $35k to pad your numbers up there a bit. That's really close to break even if all of the cars are dealer inventory. Make a few of those cars direct factory orders and we're getting into reasonable profits of a few percent.

  17. billy says:

    what about when they spring the "internet purchase" fee on you?

    • Fred says:

      What to do when they spring the "internet purchase" fee on you? Do the same thing you should do as a buyer if they have a "Pack Sticker" on the new car. That's the dealer add-on window sticker, usually placed right beside the manufacturer's window sticker, which are now even printed to look almost identical to the manufacturer's stickers. This sticker could list such things as "paint sealant, anti-theft window etching, upholstery protection, pin stripes, etc. These products are usually marked up anywhere from 5 to 100 times their cost, and IMHO should not be purchased. One example: at an import dealership I was an F&I manager at, we charged $100 on our pack sticker on every new car for "anti-theft window etching". The clean-up guys who washed the cars did this etching at the dealership, and it cost us about 10 cents per car! Just like internet purchase fees, I would tell the dealer that I will simply not pay for these items at all. If they object, I would thank them for their time, and get up and SLOWLY head for the door. Often they will drop these fees before you get to the door. If not, keep going, as there are plenty of other dealers who will either not charge these fees at all, or else will waive them upon request.