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© Steve Duncan, 2007
Buying or selling cars is much like buying and selling stocks. The transaction is rarely balanced. Someone will profit, and someone will either pay too much or get too little for their money. In the parlance, the loser in these deals is called the “bag holder”. This document is intended to help keep you from getting stuck holding the bag. What is actually in the bag, however, is subject to discussion.
Guidelines applicable to both new and used cars
- Don’t make a snap or emotional decision! The snap decision occurs when people “just go out to look”, usually on a Saturday. They find a car that looks good, is the right color and seems to be reasonably priced. The problem is you can’t do research on a car at the lot or private parties house!
The emotional decision is when you either fall in love with the car, or feel like “this is it, gotta do it now”. Well, you don’t have to do it now! Make sure time is on your side by giving yourself many days or weeks if needed. And, for every great car you find, there are many others just as good or better.
- Know what you want and need. You may think you want a little pickup. You can haul your stuff, and it gets good mileage, right? But when you want to take 3 friends to the mall, you’re out of luck. And do you really want to drive a gutless, bumpy little truck for 2-3 years? Maybe you do!
What is really important to you? Comfort? Economy? Room? Cargo hauling? Reliability? Buy for your requirements and value, not because a car is popular or stylish or a certain color. And please don’t fall for those feel good ads on TV.
- Know what price to pay. The best place to determine a good price is the Saturday paper. Yes, you can get pricing for both new and used cars on the internet, but in the Saturday paper, you can see two important data points:
- New car loss-leader pricing. This is where dealers try to out-do each other in escalating discount wars. Phony sales where “invoices are clearly posted”, or “employee pricing” is offered don’t mean a thing, because the dealers have all kinds of leeway that you don’t know about, such as factory-to-dealer incentives. They rely on the fact that people will not want the loss leader, or get “sold up” when they get there, or the loss-leader will be sold. Look at the discount off MSRP as both a percentage and a dollar amount so you can apply that to other trim levels of the same model.
- Actual asking prices for used cars. Yes, you can get “Blue-Book” and “True Market Values” for used cars from a number of sources. But what you can buy a car for in your town can vary greatly. Look at the range of prices for a given model, and make note of the mileage, condition and equipment. Remember, most people have built in a discount they are willing to give prospective buyers.
- Know about a car’s reliability and resale value. Certain vehicles are notorious for either mechanical problems or poor resale. The 1980 Peugeot I bought for $15000 was worth $5000 three years later. Now if I wanted a used Peugeot, that could work to my advantage. Mechanical issues are also well known and can be researched on the internet in owners forums (such as Edmunds) or in Consumer Report’s yearly buying guide. Resale value can be researched at Cars.com by using the residual value calculator available supplied by ALG.
- Be flexible. If you are willing to take a color that is not your first choice, or that model without a sunroof, you increase your chance of finding a car that represents better value. The more you constrain your decision, the less choices you will have.
- Price insurance too. You’ve always wanted a Camero. Do you know what they cost to insure? Oddly, some of the most popular cars such as the Camry and Accord are more expensive to insure because they are frequently stolen for parts. This is because there are so many on the road! To see a breakdown by injury, collision and theft losses which directly relate to the cost of insurance, see this Highway Loss Data Institute report.
Steve’s Guidelines for Buying New Cars
- Know what to pay. As described above, know what the best discounts offered by local dealers are. You cannot guarantee that they will offer comparable discounts on all the models in the line-up, but it does give you a ball-park figure.
- Buy the loss-leader. If you can live with a white base-model, buy the loss-leader! This is the car advertised at thousands below MSRP. Sometimes, they are even a decent color and have a reasonable amount of equipment too. If you don’t like this weeks loss-leaders, check another dealer’s ad or wait till next week. Start looking Friday, Saturday at the latest. These units go fast, and by mid-day Saturday, they are likely to be gone.
- The “End of the Month, End of the Model Year” misconception. You have always heard that the best deals happen at the end of the month or model year. It is true that there are times when the dealer wants to sell more units to make sales figures, but here is a super secret very few people know (shhhh!): Dealers don’t sell cars at less than cost. It’s true! They don’t give away money! Target stores may dump merchandise below cost, but car dealers just don’t. There are many factors that contribute to the price of a car, and lots of web sites to educate you on those. Watch the loss leaders to understand a dealer’s absolute bottom line.
- Understand resale values. When buying a new car, you are throwing away money. Sorry to harp on this, but almost every new car depreciates immediately when you drive it off the lot. Think that new Hyundai is a steal at $14,000? Now it’s worth $11,000! Like that new $30,000 SUV? Now it’s worth $25,000. And in 6 months, guess what? It’s worth $23,000! How many items other than cars would you buy that loose money like that? For a long time, exact resale values were a closely kept secret. Only car dealers and leasing companies could get them from a little book called the ALG, or Automotive Leasing Guide. Now, it’s a little easier. You can go to cars.com and use their web-based interface, and Consumer Reports now has relative depreciations in their ratings. So choosing a car with good resale can save you money and lower your payments on a lease – which leads us to topic #5…
- Understand financing options. Ah, the old buy or lease decision. If you like a new car every 2-3 years, you might as well lease – if the numbers pan out. In a purchase situation, you are what the sales dudes call “upside down” for the first two or three years. This is where that depreciation we discussed in topic #4 out-paces the resale value of the car. So why not just pay “rent” in the form of a lease, and plan to return it at the end? Lease vs. buy decisions can be complicated, and much has been written on the subject. You can even download calculators for this purpose. The main point I would like to make is this: the lower the depreciation on a car, the more attractive the lease is. It used to be that car manufacturers would “prop up” lease end values. They would make the lease end, or “residual” value artificially high. Since the lease payment is a charge for the depreciation plus a charge for the use of the money, this resulted in lower payments. They took a bath on these subsidized leases, so in today’s market, you have to look for a car with good resale instead. But they don’t discount those as much!
- Shop around and be your own broker. Yes, you can hire a broker, but guess what? They are friends with the dealers! Plus, they charge a fee. If they played hard-ball with all the dealers, they wouldn’t be very popular. They may want a win-win situation, but since you only buy a car every few years, you shouldn’t worry about give and take. Also, they will latch on to you like a piranha.
Some people will tell you to go right to the fleet manager, and this can work. But once you get the nerve to negotiate seriously, you will end up talking directly to the sales manager anyway. Don’t be afraid to visit multiple dealers for the same car. This is particularly effective when doing internet buying. Be honest and open about who is offering you what for how much. You’ll be surprised how quickly they offer a better deal, but be prepared to buy and let all parties know what you decided to do. If you can’t handle face-to-face negotiations, this is they way to go.
- Don’t trade in another car. What? Sell it myself? Sure! Lots of people are looking for used cars, and there are lots of ways to advertise them. At work, on the internet, the classifieds. If you do want to “trade in” your car, remember that they are basically going to give you the lowest possible price they can for your car, or try to raise the selling price of the new one to make up for it.
- Be ready to buy. When you have found on the worlds best car at the worlds best price, buy it. No “sleeping on it” at this point. It’s OK to negotiate to the bone, but if you walk away, they will never deal seriously with you again, and your price is not guaranteed.
- Decline all extras. The dealer is in pain. You just got the car at zero profit, and your salesman is making a $50 commission. Guess what they will try next? To sell you crap! Undercoating, paint sealer, extended warranties, anti-theft glass etching – you name it! It’s all pure profit for the dealer. You have the right, no the obligation to decline any and all of this stuff. No sympathy spending at this point. If you are the extended warranty believer type, go get it from your credit union or the internet. If you are sure what they are worth, you can negotiate with the dealer for this too. Discounts of 50-70% are possible.
Steve’s Guidelines for Buying Used Cars
- Don’t buy a used car off a lot! In these days of smarter buyers, less and less is made off new cars. So guess where they are making it up? In used cars! They may make a couple of hundred dollars on a new car, but thousands on a used one. Joe Somebody trades in his 2002 Corolla for $7000. They wash and vacuum it, and put a $12995 sticker on it. Pure profit.
- Do buy a car from a private party! For some reason, this is harder for people to do. Maybe it’s going to someone’s home, or thinking they may be trying to hide something. But the truth is just the opposite. A private seller is motivated. They only have one car to sell. They have paid to advertise, and usually, they already have purchased another car. And, most private sellers try to price cars realistically.
- Find a cream puff. Believe me, they are out there. Cars that have been garaged, never smoked in, some with ridiculously low mileage. You are buying used, and you should get the nicest one you can find. Don’t just look in the big newspaper. Look in the shopper papers, and if possible, go to smaller towns and look in their little papers! This is where the 80 year old guy with the 92 Camry with 40,000 miles is going to advertise. Know when these little papers are published, and get one right away. Don’t be afraid to go 50 miles or more to look at a car. You can also read the classifieds for many papers on the internet. Don’t bother with 1-800-find-a-car.com. These sites are all in bed with the dealers. Same with those auto-trader magazines. They are published infrequently and the private parties that do use them have very high opinions of their cars. Why else would they want to show you a picture?
- Consider a less-popular model. Yes, Toyotas and Hondas are great cars. But a 2002 Honda Civic with 80,000 miles may sell for $10,000 dollars, and a 2002 Suzuki Esteem with 40,000 miles may sell for $5000. Get it? It’s back to the old depreciation game. Someone else already held the bag for you. They both get 30MPG and were made in Japan
- Ask to know the car’s history. Who did you purchase it from? Where was it sold? May I see your service records, please? Getting this kind of information from a dealer is nearly impossible, but often can be obtained from a private party. Riffle the glove box. Look for original invoices, service records, anything that would give you a clue as to the car’s origin, life and treatment. Try and find a local car that has had regular service. Get a car-fax report. This is important. This report will tell you the date and place of first registration, subsequent title changes (with odometer readings), and very importantly – if it has ever been wrecked and repaired. Now maybe you will find a car that the owner admits has a “salvage”, or “reconstructed”, or “branded” title. These all mean the same thing. The car was in an accident, flood or fire, and the cost to repair it was more than it was worth. So someone bought it from the insurance company or at an auction and had it repaired, hoping to sell it for more than they had into it. A salvage title car may be a good deal, but keep in mind that this little blemish on the title chops 50% off the car’s value. In fact, you should always ask “do you have free and clear title to this car?”
- Know the condition of the car. This is the hard one. Unless you are a mechanic, how can you tell if the car needs, or is going to need work? The safest, best way is to – duh – take it to a mechanic. This is easier said than done. The seller may be nervous about you taking the car away, and you have to locate a mechanic and take the time to take it in for an inspection, which may cost up to $100. What to do? If a mechanical inspection is out of the question, take a mechanic or mechanically inclined person with you. They will look for fluid leaks, sniff the oil and transmission fluid, check for even tire wear, bounce the shocks and more. If you do get a mechanical inspection, ask specifically what it will include. “Looks good to me” isn’t going to help you when you discover low compression in the number 2 cylinder.
- Know what you are willing to spend, and be prepared to do the deal. You should know the range of values for a car like this before you even get there. If it is immaculate, you may be willing to pay at the higher end of the range. Don’t be afraid to make a low starting offer. It gives you a stronger position to negotiate up from. Once you agree on a price, have a plan to do the deal. Have a blank bill-of-sale form in case the seller doesn’t (which is common). Know how you are going to get them the money, and again make sure they have the title and don’t have to get it from Aunt Trudy or order a replacement from the DMV.
- Take your time and enjoy your buying experience. You are the buyer, and you are in the cat-bird seat. You don’t have to buy this car, and let the seller know that. Don’t ever say “I’ve got to get a car before school starts” or something like that. Instead, try to find out their pressures: “do you still have a loan on this?”, or “how long have you been trying to sell it?”. Don’t ever offer what your budget is either. Remember, there is a difference between lying and just not turning over all your cards.
Be knowledgeable, have patience, and enjoy you
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Shopping for a Slightly Used Vehicle - Buying a Rental Car
Maybe you have considered buying a slightly used vehicle as an alternative to a new car. If you have looked around at one year old cars on dealer’s lots, you are probably amazed at how much wear and how many miles someone can put on a car in 12-18 months. Go to a dealership and look at a 2006. Chances are it was a rental car bought at auction. A Carfax report will tell you. Park one of these in the sunshine for an hour and climb inside. Smell the bouquet of residual smoke and disinfectant? Now look at the floor mats and plastic surfaces. See the ground in dirt and deep scratches? They buy these under low (wholesale) book value and try to sell them at or above high book. “Low miles”, and “Loaded” are two commonly overused terms. Well, if you think 23,000 miles is low for a one year old car, and “loaded” means power windows and locks, I guess that could be true.
Now I’m not saying that rental cars might not be a good value at times. It can be a way to get into a one-year old car at a significant discount. And, they do get regular oil changes. In fact, if you buy directly from a rental company, you can ask to see the service records. Here’s what else to look for and consider...
- Mileage. Most of these have between 20-25,000 miles on them. This can put you within a year’s worth of miles of the warranty expiration.
- Condition. If the interior is not scratched up too badly, and smoke residue is not detectable, you may be OK. Don’t be fooled by shiny, freshly armoralled surfaces. Touch the fabrics and plastics to see if they are sticky or matted.
- Options. You won’t find the real goodies on a rental car. Moon roof, high line stereo, the third seat, etc. don’t get ordered on rentals. What they do order are the essentials needed to make the car desirable enough to sell when they are ready to dump it. Air, power windows and locks, and an automatic are standard fare.
- Price. You are buying a rental car, not someone’s used cream puff. So you’d betted get a real deal. And I don’t mean Kelly Blue Book dealer retail. In my opinion, you’d better pay no more than Edmund’s private party retail on one of these.
After all, you are taking a modestly equipped, high mileage vehicle to save money.
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r new car!
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