Thursday, November 23rd, 2017

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The Truth About Used Car Prices

Before you buy a used car from a car dealer, you should understand a little about pricing. A franchise dealer with a used car operation will usually price his cars at a certain percentage more thanwhat the car is deemed to be worth on the wholesale market.

The wholesale value of a car is usually determined by factors such as the demand for the car coupled with the age, make, model, options, mileage and general condition. The dealer’s markup on a used car, van or pickup is frequently determined by any or all of several factors.

  • The price the dealer paid to acquire the car. He might have taken it in trade against a new car — which means that he accepted the car in lieu of cash or he might have purchased it from a private seller, a wholesaler or bought it at auction.
  • The dealer adds what it has cost him to repair and recondition the car.
  • The dealeradds a markup to cover his profit objectives and to pay for his overhead.

The markup will also reflect such things as the condition of the car, the mileage, the make, model, options and most important, the market demand. The point, simply, is that used car markups will vary greatly for any number of factors. Your objective is to discover what has it cost him to buy and recondition the car and put it on his lot. That will give you the basis for planning your negotiation.

Negotiating tricks

Many dealers will also include a “negotiation pad” in their markups. They recognize that most people won’t buy a car — new or used — unless they feel they’re 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 to be a reasonable, or maybe even a more than reasonable, profit.

Insider information on pricing

The key to a dealer’s survival and profitability in the used car business is to buy used cars at or below what the industry calls the “wholesale price” and then to sell them at a retail price that, in the final analysis, is whatever a buyer will pay. Here is an actual example:

I tracked a GM car that was purchased by a dealer for $9,500. After spending $400 for repairs and reconditioning, he put it on the lot at $13,800. That’s a markup over his purchase cost of more than 45 percent!

The used car sales manager confided that this markup gave him built-in room for negotiation. A buyer finally appeared, and after a negotiated agreement, bought the car for $12,450. The customer felt he’d gotten a deal and the seller said nothing to disabuse him of that notion.

Determining the “wholesale” price

Whether you buy from a private owner or a dealer, one of the most important pieces of information you can have is the current “wholesale” price of the car in your area of the country. One source of auto price 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.

Book prices

The industry uses any of several books as price guides: The “NADA Official Used Car Guide,” “National Auto Research Black Book,” “Kelley Blue Book Auto Market Report” and “Galves Auto Price List.” These books — also available online — purport to reflect the average wholesale prices that various cars are bringing across the country. The only problem is that they usually don’t agree on a set price.

Compare the suggested wholesale prices for a 2000 Chevrolet four-door Lumina from the same month:

  1. Kelley Blue Book : $7,875 [Tends to reflect West Coast prices]
  2. NADA: $6,875 [Combination of auction and dealer reports]
  3. Black Book: $5,650 to $8,850 [Dealer auction sales reports]

Consumer price books and Internet websites

You can find used car price books on your newsstand or on various Internet sites, e.g., Edmunds.com. For example, Edmund’s wholesale price for a 2000 Lumina is $7,387. Their figures provide a general range, but they may not present a true picture of any given car’s “real” price because they cannot account for the myriad factors that impact the dealer’s costs.

© 2008, Young Money Media, LLC. All rights reserved.

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2 Responses to The Truth About Used Car Prices

  1. Pingback: Five Good Used SUVs for Your Money

  2. Robert Koch says:

    Mike Sullivan, it’s funny that an individual from a lending institution is commenting on dirty tricks. The amount of markup varies on what the current market conditions are for that exact vehicle and what a dealer paid for it. For example, dealers typically put more money into local trade ins than they do for cars they buy at auction in order to keep the local business. So say a dealer has 5 similar Ford F150’s in stock. Each of those trucks is owned for a different amount, even if they have the same Retail Value. So the markup in one truck could be $3500 and the other truck could be $1900 due to the fact that they own the one for more money. Dealerships are not non profit companies, they need to show a profit and have every right to do that. The percentage of markup is far less than what it is in most other retail markets. The average used car profit for most dealers is probably $1000-$2500 per vehicle sold. And then from that the dealership probably is paying commission to their staff and the manager and sales person has to get paid from that amount.
    As long as the car is being sold under a retail amount and is a good deal compared to what else is on the market and available for purchase at that time, then it is up to the buyer if they feel that is a good deal. If you can find the same car for less money, then buy the car that is less expensive. A consumer will never know the amount of markup in a used car sold and individuals outside of the dealership will not know. If a car has been at a lot for a few months then the dealership will have to move the car very soon or have to pay interest on the car and that goes to the bank that inventories the inventory. Just like what good ol Mike Sullivan did from the earlier post. So when a car has been there for a while a dealership will generally lower the price to cost or close to it in order to sell it before the dealer has to sell it to an auction and take a good sized loss. Many dealers will share this info with you if you ask. Assume that a dealer pays someone $10000 for the trade in, the general expense before it hits the lot is closer to $1000 on the average these days and that does not cover any major expense like tires for example and that is a pretty common item to replace. SO say a dealer has $1500 added to the car they are now at $11500 and Retail would probably be around $13900 for a car like that so that is what they will list it at and leave room to negotiate. So say they sell it for $13000. That will leave them with a $1500 profit to then pay 20%-35% of that amount to the sales rep and then still pay the manager as well if there is one involved. Most dealers will have a DOC fee which will be $100 to $300. I am guessing that is what Mike Sullivan is speaking of. That is common and pays for much of the paperwork processing involved and the staff that handles it. The state and county paperwork is fairly extensive in most area’s and that is what this is generally for. Feel free to ask the dealer you are by the car from if you have questions. It is clearly disclosed and documented on the legal forms signed to buy a car. It is similar to the fees when you get a mortgage from a lending institution like Mike Sullivan’s listed above.

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