what you need to know about used car pricing

What You Need to Know About Used Car Pricing
By Bob Ford

Before you shop for or buy a used car from a dealer, you should really 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.

&amp#9679 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 in lieu of cash - or he might have purchased it from a private seller, a wholesaler or bought it at auction.

&amp#9679 Second, he will add what it has cost him to repair and recondition the car.
This might include body work, new parts and detailing.

&amp#9679 Third, if he is a good business man, 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 mark-up to include in the selling price. The amount of the mark-up 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 to be 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 than 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 Really 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 mark-up. 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 percent. 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.

Another example: A sales manager dealing with a totally 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.

Book Prices
The industry uses any of several books as wholesale 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 - and they can be accessed on-line - purport to reflect the average wholesale prices that various cars are bringing across the country. The only problem is that they don t always agree. Compare the suggested wholesale prices for a Chevrolet Lumina from the same month:

Kelley Blue Book $7,875 [Tends to reflect West Coast prices]

NADA $6,875 [Combination of auction and dealer reports]

Black Book $5,650 to $8,850 [Reports from dealer auction sales]

Getting to the Source
Arguably, the best source of used car values is to go direct to the auction market reports. There you will find both national and regional wholesale prices. Unfortunately, those reports are available only to dealers. The only non-dealer source we know of for auction price reports is through a service provided by Car-Smart-Shopper. For a very small fee, they will email you the most recent wholesale (auction) prices for virtually any car on both a regional and national basis. You’ll find them at www.Car-Smart-Shopper.com.

Once you have the wholesale price, you can then begin to determine what additional cost (i.e. repairs and reconditioning) the dealer has put into the car. How do you determine this number? Ask the sales person. Chances are the salesman will give you a complete run down of what the dealer has done to improve the car to help him justify the asking price.

We’ll discuss using the wholesale number as a negotiation tactic in our next article.

Bob Ford
Website: Really Useful Guide to Buying Used Cars
http://www.Buying-Used-Cars.com

Author: What Car Dealers Won’t Tell You. Amazon.com

For over 30 years Bob Ford has worked in and around, and written for and about the automotive industry. His extensive exposure ranges from the executive suite to the factory floor to the dealership. He’s had virtually totally free access to closed door conversations, crisis management meetings and to some pretty odd and even questionable behavior.

Ford is author of “What Car Dealers Won’t Tell You.” an “insider’s guide” to buying a new and used car. It details what to look for, what to watch out for and provides negotiation strategies and inspection guidelines designed to help buyers avoid scams and buyer pitfalls.

Media/Lecture Credits: Ford has appeared on television as a subject expert on The Today Show, Fox News, CNN, many local market cable shows and dozens of call-in radio programs. He is invited by civic organizations and clubs as a guest speaker. He also is the automotive editor at-large for Young Money Magazine.

For over 30 years Bob Ford has worked in and around, and written for and about the automotive industry. His extensive exposure ranges from the executive suite to the factory floor to the dealership. He’s had virtually totally free access to closed door conversations, crisis management meetings and to some pretty odd and even questionable behavior.

Ford is author of “What Car Dealers Won’t Tell You.” an “insider’s guide” to buying a new or used car. It details what to look for, what to watch out for and provides negotiation strategies and inspection guidelines designed to help buyers avoid scams and buyer pitfalls.

Media/Lecture Credits
Ford has appeared on television as a subject expert on The Today Show, Fox News, CNN, many local market cable shows and dozens of call-in radio programs. He is invited by civic organizaitons and clubs as a guest speaker. He also is the automotive editor at-large for Young Money Magazine.

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