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Strategies for Smart Car BuyersSM
Invoice Scams and Sudden Extras — The Game is Changing
By Philip Reed, Senior Consumer Advice Editor
Email
I recently gave a seminar on car buying, and a man in the audience asked a question
that came back to haunt me.
"I was negotiating for a car, and the salesman suddenly showed me the invoice,"
he said. "Should I be suspicious?"
It took me a minute to understand the question. In recent years, experts have
been telling consumers to demand to see the invoice. So why was this guy asking
if he should be suspicious when the invoice was volunteered?
Finally, I figured it out. "Oh, you mean, if he volunteers the invoice,
is that a danger signal?"
"Yeah, right," he said.
Then I gave an answer I wish I could take back: "No, that's not a red flag. Salespeople
are just responding to the consumer. They know you won't consider it a good deal
unless you see the invoice. They're trying to show you they are open and honest."
Let me say that I sincerely hope this was the case. But it might not be. And I
want to take this opportunity to expand on a trend I think is developing in the
car-buying arena.
First, bear in mind that the profit margin on a new car is much slimmer than you
would assume. While other products are marked up by as much as 50 percent, cars
only have a profit margin in the single digits — typically from 2 to 6 percent.
This means that a car sold at 4 percent over an invoice of $20,000 would make
$800 for the dealer on the actual sale (more on this later). If the salesperson
makes a 10 percent commission on the profit, that's just $80 for him or her.
According to the National Automobile Dealers Association (NADA), new car sales
generate only 25 percent of the profit for a dealership. Another 29 percent comes
from the sales of used cars. But most of a dealership's money, 46 percent, is
made on service and the sale of parts.
So you have to understand that when you walk into a dealership, you are being
viewed as a profit package.
- You might buy a new car.
- You might buy high-profit extras in the finance and insurance office.
- You might finance the car through the dealership.
- You might trade in a used car they can resell.
- You will hopefully have the car serviced there over the next three to five
years.
And on top of all those things, you will hopefully buy your next car at the same
dealership in the not too distant future.
What does all this have to do with reading the invoice? I wanted you to have an
understanding of the big picture before we move on to the fine points, as well
as see why dealerships will do fine in the long run even if the profit they make
on new cars is very low.
During a recent discussion with my accountant, he asked me, "If profit is low,
then why are the owners of dealerships all multimillionaires?" Well, that's because
the thirst for profitability at a dealership is insatiable. To achieve profit,
in an era of increasing consumer education, the game changes. Which brings me
to my point: If you negotiate in relation to the invoice — say, $500 over
invoice — make sure the dealership isn't building up profit in another area
of the deal.
Here's an example. A friend of mine was shopping for a Dodge Grand Caravan. He
showed me a copy of the invoice and said the Internet department of a local dealership
said that he could have the car for the invoice price. "Great," I said. I went
to the friend's house the next day and saw a shiny new Dodge Grand Caravan parked
there with the dealer promotional plates on the rear.
It's a touchy thing to discuss a car deal once it's been inked, since it's a foregone
conclusion at that point, so I proceeded cautiously.
"Are you happy with the deal you got?" I asked.
"Well, we got the van at invoice but..." Uh-oh. Here it comes, I thought.
"When we went to sign the contracts, we found out they had included $800 for an
alarm system. We bought it anyway since we were getting such a good deal —
and we really wanted the van."
Here are nice, easy-going people, who were put in an awkward position. "Over a
barrel" is more like it. They come in thinking they did their homework, got the
best deal possible, then they get nailed for an alarm system they didn't want.
The alarm system probably didn't cost the dealership more than $100.
In another case, a friend of mine was told by a dealer that he could buy a hard-to-find
Volkswagen for $500 over invoice. When the contract arrived, the dealers had added
a $349 fee for "D&H" or "delivery and handling" charge. This charge was added
to the contract despite the fact that the invoice already contained the following
charges: $550 for the destination charge, $200 ad fee, $92 for "floor plan interest
reserve" and a $25 "port prep fee."
After checking with industry sources, it is Edmunds' position that fees on the manufacturer's invoice are not negotiable. However, if duplicate fees (such as the "D&H" fee in this VW contract) are written into the contract by the dealer, these additional charges can be challenged.
A friend of mine who worked in the banking industry reviewed the VW contract and
honed in on the "D&H" fee. "In the banking industry this is what we called a 'junk
fee.' You should just go back to the dealer, smile and say, 'Nice try.'"
So, let's go back to the question I got in the car-buying seminar. If the salesperson
readily shows you the invoice, declaring, "And we'll sell you this car for only
$500 over invoice," keep this in mind: The profit might be built back into the
equation in other places.
If you are shopping over the Internet, or over the phone (highly recommended),
ask these questions:
- Does your dealership install alarm systems or include other add-ons that
I don't know about?
- Does your dealership include charges not on the actual factory invoice:
delivery and handling or advertising fees?
Also ask to have the contract faxed to you ahead of time. Look for charges added
by the dealership and question anything that looks out of place.
One last tip. Begin the car-shopping process by checking Edmunds.com's TMV®.
In the case of my VW-buying friend, the extra charge added by the dealer built
the price back up to TMV. My friend would have been much happier to have paid
TMV up front, rather than being deceived into paying it with bogus charges and
sleight of hand.
For this, and other buying and leasing strategies, pick up a copy of STRATEGIES FOR SMART CAR BUYERS, by the editors at Edmunds.com.
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