By It takes more than Web research to get a bargain
By Robert Hammer and Stefanie Kelly
In an age when the Internet makes seemingly limitless information available to the general public, shopping for a new car has become slightly less mystifying.
Research that once required a trip to a local bookstore or the public library can now be conducted from the comfort of one’s home at any hour of the day or night.
In addition to automotive and consumer-advocate Web sites (and periodicals) that make it possible for new car shoppers to obtain specific pricing information before setting foot into a dealership, automobile manufacturers have dazzling Web sites that allow consumers to explore models, colors and options with the click of a mouse.
Consequently, many consumers actually feel empowered as they prepare to drop a bundle for their new wheels. And while there is more information available to the consumer today than ever before. The realm of sales in the auto industry is not as user-friendly as you may think.
At any given time, automobile manufacturers offer what are known as incentives to the dealerships selling their vehicles. Generally an incentive translates into pure profit over and above the invoice, or the dealer’s cost on the vehicle.
Let’s use a vehicle that invoices at $40,000 as an example. Joe Consumer, having done his homework, decides that if the dealer paid $40,000 for the car, he wants to pay $40,000 for it. He wants the dealer to sell him the car at zero markup.
But Joe is not aware of the incentive money in the vehicle, which gives the dealership a substantial amount of room to “play” with the numbers. And the salesman is not going to reveal this to Joe because he wants to make as much money on the transaction as possible.
Joe tells the salesman he wants to buy the car at invoice. The salesman, after hemming and hawing and trotting to and from his manager’s office, tells Joe that, reluctantly, he will sell the car at $40,500 - just $500 over invoice.
Joe, a businessman himself, decides this “minimal” markup - still substantially below MSRP - is a great deal. The poor salesman’s got to make a living, right? He signs the paperwork and drives home in his new car feeling very pleased, indeed.
Meanwhile, the salesman and his cohorts are giving each other a round of high-fives. Unbeknownst to Joe, they’ve just made $5,500 on his new car.
No amount of research would have told Joe about the incentive factor, but if he had been privy to this inside information he could have saved himself thousands of dollars.
It is important to note that incentives are not the same as holdbacks, a term many consumers know but few understand. A holdback is money - usually 1-3 percent of invoice - the manufacturer sends the dealer several months following the sale of a vehicle. Unlike incentives, which are only in effect from time to time, holdbacks exist on almost every vehicle all the time.
Shareholders and owners of dealerships consider holdback money as profit. But holdbacks also cover vehicle flooring cost, which is the interest paid on money borrowed by the dealer to purchase vehicles from the manufacturer (or to get the vehicles on the showroom floor).
Therefore, holdback money - unlike incentive money - is rarely available to the consumer. An exception would be if dealers in a given area have vast numbers of the same vehicle in stock, and are in a panic to sell. In that case, holdback money may be made available to the consumer.
The bottom line is no matter how well-read a car buyer is, without the aid of a well-connected broker who has established the right relationships within the automobile industry, he or she cannot gain access to the vital (and typically confidential) information that distinguishes a great deal from the illusion of a pretty good one.
Hammer and Kelly are associated with Hammer Auto, a new car auto broker in Palo Alto. For more information, call 813-6100 or visit the Web site at www.hammerauto.com.
