Friday, January 15, 2010

Buying A Car In 2010

The vehicles I have owned span a great distance in vintage and function. The 1962 Chevy Corvair was great for weekend excursions on warm California days. The 1965 Lambretta gave me occasional thrills and mechanical anguish on the streets of San Francisco.  The 1994 Ford Escort Wagon shuttled me safely to and from work for years, and even transported my wife and I from California to Boston before being sacrificed to an excited New Hampshire man who owned its twin.

But until this year, I have never once owned a brand-spanking-new car. I've been sort of proud of that over the years, since my needs were minimal and my mechanical inclinations left me just willing enough to cope with minor malfunctions, funny noises, and occasional breakdowns. The amount of money I've spent on used cars, even with the repair bills, probably adds up to far less than what people typically spend on a new car.

Late last year, my wife and son were in a frightening but non-injurious accident that left our latest car, an inherited 1998 Jeep Wrangler, on the wrecking pile.  It was time to buy a new car, and this time we decided we'd actually consider buying a new car.

But buying a new car sucks. I mean, it's not too complicated in some senses: you find a car that offers what you want, then you pay for it. But the devil is in the details.  Finding the car you want is dizzying because of the huge number of options and variations even within a particular model lineup. Then you pay a premium for the newness itself, but often you pay a premium to the dealership's salesperson who runs a confusing array of numbers by you, compounds that with a complicated financing plan, and asks you to sign on the dotted line.

So most people I know who have bought new cars seem to come away from the dealership with a car that is close to what they wanted at a price that seems fair. But that isn't good enough, is it?

Choosing A Car

This is, naturally, one of the hardest questions to answer in any context. Most people aren't really sure what they want. So perhaps it's better to decide what you think you want, and go with that. To come to a point where you can make an intelligent buying decision, you need to be pretty confident about the precise vehicle you would like to own. To get to that point, you start out with a list of manufacturers and models, then you test-drive them. Yes, this is tedious. You have to go the dealerships and brush with salespeople who are infrequently devoid of sleeziness. But unless you've test-driven a friend's car and are 100% sure it's the right one for you, I think you need to suck it up and get some hands-on experience with the expensive thing you're about to buy.

For every car you're interested in, call the most convenient dealer to you, and make an appointment for a test drive. You'll be dealing with the sales team, and the rule for the sales team is to give them as little information as possible. A good stance that worked for us is to pretend you are "very early in the process" even if you're almost positive the car you're test driving is "the one." Above all, commit to yourself that you will not be purchasing a vehicle from the dealer on the day you test-drive. If you read through the section below on getting a fair price, this commitment will be easy to keep.

Lots of cars these days come in a variety of "trims." So once you've decided that the Punkass 2000 is the one for you, you might further have to decide whether you want to buy the Basic, the Fancy, or the Whizbang. This distinction is important because when you go in for a test-drive, there is a good chance they will put you in a Whizbang, even if you've asked them to test a Basic. Obviously, they want you to fall in love with the car and buy it right there, and it's much more likely to happen if you're in a Whizbang. This ruse sort of worked on us, and opened our eyes to some of the advantages of the Whizbang. In retrospect, I'm glad we had the luxuries forced upon us, but if you're committed to sticking with a lower-end model, make sure you force the dealer to actually let you drive one.

Finding The Fair Price

The automobile retail scene in the United States is completely confusing. Don't beat yourself up if you don't even know what a fair price is. I don't think most people do. Here's a nutshell orientation.

Every car has an MSRP (manufacturer's suggested retail price), which is a term you are probably familiar with. Cars in any particular region also have a standardized invoice price which is probably a little less familiar to you. Ostensibly, this is the price the dealer paid to the manufacturer for the car. In other words, the difference between the invoice and the MSRP is the dealer's markup. Just as the bag or Dorito's with a list price of ¢99 only cost the dealer (supermarket) ¢50 or whatever, the car dealership has to charge more than they paid, so they can afford to pay employees, rent land, finance cars, etc. So it's only fair to pay MSRP, right? So the car dealership can stay in business and give you a convenient place to test-drive cars?

Don't get too weepy for the car dealers. First of all, you're spending a bazillion dollars here. So let's say you buy a $30K car and the invoice price was $27K. That's $3K in profit for the dealer, just for service of having shown you a few cars and let you test-drive them?  You could pay $28K and still be giving the dealer plenty of incentive to stay in business.

But other complications in the business make the "fair price" even more amorphous. Dealers have other incentives to get you to purchase a car from them, apart from the pure markup profit of your purchase.  Topping the list of confusion-inducers is a concept of dealer holdback which is a percentage of the invoice price which the dealer will be paid in cash, by the manufacturer, when the car finally sells. Yes, this means the invoice price is not actually the price the dealer paid. That puts a slant on our simple calculations of fairness, doesn't it? Returning to your $30K car, let's assume the dealer holdback is $600. Now, if you pay invoice for the car, the dealer is still making $600 for the privilege of your business. Not too shabby! This phenomenon is what leads to the puzzling reality that many dealers will, when pressed, sell a car for less than the invoice price. To a naive observer, it appears that the dealer has conceded to lose money, but they are no dummies. They know they are locking in a certain profit or they wouldn't be making the deal.

Even if you grind a dealer down to the floor with your bargaining savvy, and convinced them to make no profit from the transaction, they stand a good chance of milking you for some extra cash, possibly enough to make the "zero profit" transaction well worth their time. A big one is financing. As good as car salespeople are at selling cars, they are good at selling financing plans. Basically, if they can sell you the financing plan right there at the dealership, they've just made a good chunk of money, probably enough to make it worth taking zero profit on the car.

Another thing I discovered in my research is that dealers are adapting to the fact that savvy internet-enabled customers know about invoice pricing, and even dealer holdback. Some customers will walk in off the street and demand to pay invoice pricing for a car, or even less. Before you count yourself too smart, consider the dealership has been doing this a lot longer than you. They have ways of making you poor.  Remember I drew a distinction between the invoice and MSRP price of the car? Well, the same distinction is applied to each and every accessory or add-on option that you might request from the dealer to perfect your purchase. What some dealers will do is flaunt the incredible deal they are giving you on the car itself, while charging you full MSRP on the option you choose to install.  One dealer brags about its "less than invoice" pricing on the web site, but neglects to mention that all of the accessories and options are charged at full price.

So let's take that $30K, and pay invoice minus $600: $26.4K for it. What a deal! But you also wanted some nice additions: bumper guard, wheel-well moldings, multimedia upgrade, heated seats, whatever. Let's say they add up to $2K. The dealer adds them to the order, bringing your total to $28.4K. You're sitting pretty, you just paid almost $2K less than sticker price and walked away with a bunch of luxurious add-ons. Quick, get on the internet and brag about! But the invoice price of all those options was only $1K, and your dealer is feeling pretty good about themselves, too. See what they did? They got their $1K for letting you test-drive the car, and made you feel awesome at the same time. And maybe that is a great equation. Maybe we should just let it stand at that. After all, the dealership deserves to make some money, right? Or maybe we should get an even fairer price.

Making It Happen

The great thing about the internet is that it makes all this information available to us. The bad news, it doesn't magically give us the cojones to walk into a dealership, start throwing down mad logic and demanding a perfect deal. You have to have the subtleties I've outlined above, and probably many more, totally cemented in your mind in order to survive the whirlwind of sales-speak and come out even moderately victorious.

Fortunately, the internet has sensed our apprehension and come through with some services that help to bridge the gap between knowledge and execution. There are online negotiating services that essentially promise to locate a dealer in your area who will give you a car for a particular price. The de facto "savvy" price target for these kinds of services seems to be "invoice +$0". They promise to find you a car for this price, you go to the dealer they have selected for you, and things go pretty smoothly and without hassle from there.

These services are great, but you have to remember that they are still making money somehow. The car dealerships are paying the service for having brought them a customer (you) who the car dealerships know full well they will still have lots of opportunity to make a large profit off of.

I settled on a service that takes no payment from the dealers, called It's a service of a non-profit consumers organization, and you pay them to do the dirty work of negotiating a price. The process they apply is really simple, and they even describe it in detail on their web site. You can take the knowledge from that site and do all the work of faxing dealerships, demanding precise terms, etc., yourself. Or you can pay CarBargains $200 to do it for you. Essentially what they do is to contact several dealerships in your area, and ask them to bid on your business, in terms of invoice-relative pricing. What this means is, they promise that whatever options you end up adding to the car, the price you pay will be determined by adding the invoice price of the car itself, and the invoice prices of the options, and then adjusting by the invoice-relative price they bid. 

I paid CarBargains $280 to request bids for three distinct styles of Subaru Outback. (The cost is $200 plus $40/additional model from the same make). One drawback to CarBargains is there is a little delay. I had to wait a couple weeks for the process to unfold, but the good news is I just kicked-back, relaxed, and waited. No pressure, no haggling, no psychological warfare.

When the bids arrived, I had before me a stack of papers from 8 or so Boston-area dealerships. Each dealer had specified an invoice-relative price, and any other terms of business that were pertinent. The bids also include any extra fees the dealer might charge for weird things like "closing costs." One of the huge benefits of CarBargains is that you end up with a sheet of paper that allows you to truly predict the final cost of the car should you choose a particular dealer or another.

Bids from my local dealers range from invoice -$300 to invoice +$50. Obviously, they are all aware that they need to be "in the zone" to even have a chance at my business. Some of the dealers had stipulations that the bid price only applied to cars that were ordered. This is because they don't want to let a car on the lot go to a savvy internet buyer. They want that car to be on the lot when they guy off the street comes in, expecting to pay MSRP.

CarBargains gives you the name of a contact for each dealership whose job it is to deal with these kinds of offers. This is the part of car dealerships that is (more or less) separate from the sales force. Think of the team that sells cars to police departments, or corporate fleets. These guys don't need to be sleazebags, and as a consequence they don't have any skill or desire to be so. The friendly "inernet sales manager" at the dealership I called was extremely attentive to my needs, was zero-bullshit, and essentially lined up the process for me, calling me back when necessary and in a timely fashion. Zero pressure. Zero sales. Just the price he had bid to CarBargains, and we're down to business arranging options.

Getting The Specific Car You Want

Now, let's be real. Part of the reason you're getting such a great deal on the car is because you've been willing to be patient. If you walk in off the street and demand the terms I've received via CarBargains, they will laugh you off the lot. For one thing, the low-grade salespeople on the lot probably don't even know that deals like this exist. No offense if any car retail professionals are reading, but your typical salesperson is much more psychologically intelligent than anything else.

The extremely low price you have arranged to pay is partly due to the fact that the dealer is, in turn, not spending much money on you. They were possibly not even the same dealership you test-drove at. They aren't paying rent to store your car on the lot. They didn't pay a salesperson to coax and coddle you. They didn't even have to advertise on television to get you to come through the door. So they can afford to be generous. They're typically just "lining you up with a car." They're the go-between that gets you access to the manufacturing and distribution process.

This process varies a lot from manufacturer to manufacturer. I believe that for US-made vehicles, it is quite common to be able to put in a so-called "factory order" to get the exact car you want with the exact details you want.  This is also true to varying extents with foreign manufacturers, but it's not always as straightforward as that. You have to ask the representative at your dealership how it works to understand how it can work for you.

In the case of Subaru, the car I ended up buying, it works something like this:

  1. Engines (and other big parts?) are made in Japan and shipped to the USA.
  2. A plant in Indiana assembles fairly generic vehicles for each trim, e.g. a "Premium Metallic Silver Subaru Outback 2.5i w/Moonroof".
  3. Regional distributors coalesce orders from local dealerships into "allocations" from the assembly plant, to be manufactured and then delivered.
  4. Upon delivery, the local distributor "outfits" each cars with a set of options, according to the orders of each dealership.
  5. The outfitted vehicles are delivered to the dealerships, where they are sold to consumers.

In this setup, everything in the "outfitting" phase at the local distributor is considered "factory installed" in terms of cost. You might also see the term "port installed." So if you have options that you really want on your car, it's a great idea to get them port installed, because you won't have to pay the dealership for the labor of installing them. Let's say your dealer has a car on the lot that is perfect except it doesn't have the "mulitmedia system" you were hoping for. No problem, they will swap that out and give you the desired system, but they'll charge for installation.  If however the dealer has a car "allocated" but yet to be outfit, they can ask the distributor to outfit it with the multimedia system of your choice, with no extra cost for installation.

We ended up going for the "custom outfit" arrangement, which involves paying the dealership a deposit fee to "lock down a car" in our name. Conceptually, I believe that car does not yet exist. It's a twinkle in the glimmer of some factory worker in Indiana. Sometime next month, the car will roll off the assembly line in Indiana, and will be stacked up onto a cargo ship, sail to Rhode Island, and drop the car off at New England Subaru's distribution center. Here, it will be "outfitted" with the precise set of options we ordered (at invoice price!). Then, it will be transported to our local dealership, ready for us to buy it.

At this point, I'll either stroll in with a check from my preferred financing method, or agree to take the dealership up on their financing offer.  This will be the first time I have stepped foot into the dealership. I will hand the check over to the friendly fleet manager with whom I have been doing business, sign the paperwork, and drive off in my new car.

I hope this long explanation of the process as I understand it, both in general and specifically as it applied to us, will help make sense of this daunting task for some of you who are in the market for a new car. It really can be fairly easy and stress-free. You can get the precise car you want. And you can get it for a really fair price.

Good luck!

Update: Taking Delivery

To wrap up this story, let me explain how the car purchase actually went down.

On Monday, February 15, I got a call from the dealership, telling me that my car was ready. There had been some confusion about whether a certain option was available for installation at the port, so they ordered it directly and installed it at the dealership, at no extra cost.

Importantly, way back when I made the order, I had asked the representative to itemize the invoice costs for every item I was adding in to the order. This left me with a printable "expectations" sheet that I could take to the dealership. It included assumptions about the base invoice price, all the options, the state sales tax, license fee, and ultimately, the it should cost approximately this much number.

The process at the dealership was a little slow, but ultimately went smoothly. In spite of the fact that I did all my dealings directly with the "internet sales manager," when it came time to pick up the car, they assigned me a salesperson to go through those final steps. He was fine, and understood completely that the numbers were already worked out. I guess there is some incentive on his part to get high ratings from me, because he drove 45 minutes to pick me up from my house and take me to the dealership to get my new car.

When we arrived, we took a quick test-drive of the car to make sure everything was working fine. Then I looked over the car for blemishes. Ugh! There was a nice little gouge on the edge of one of the interior panels. It looked like somebody had manhandled it during assembly and they just hoped that nobody would care. I cared. When taking home a brand new car, you at least want it to look brand new for a while, right? I complained to the sales manager and he stepped right up, asking a mechanic to swap the panel with a panel from another car of the same model.

The payment process was simple as can be. I wrote them a check for the total, minus the $1000 I had put down as a deposit to make a special order. They tried to sell me some special extended warranties but when I politely declined they just moved right along. After payment, we had to get insurance on the car, so I had called ahead to our preferred agent to warn him. The dealership faxed him information about my new car, he faxed back proof of insurance, and the dealership was then able to assign license plates on behalf of the state, and perform the required (even for brand new cars!) emissions testing.

About 2 hours after arrived at the dealership, I drove off with my fancy new car. I noted that I had not driven so carefully and been so paranoid of an accident or even a scratch since driving my son Henry home from the hospital he was born at a year and a half ago.


Kerri said...

Congrats on the new car! Be sure when you get there that the car they give you precisely matches what you've ordered. If it's not, be prepared to walk out. (I've walked out on car deals twice, and both times wound up getting the car on my terms...but it's risky and not fun.)

I did something similar to this, and when the car arrived, it had upgraded wheels, and an additional $300 on the price. They tried to haggle and wear me down or whatever, but I just walked out. By the time I got to the door, they caved, and I got nice wheels for free. But I'm guessing they were willing to take the risk because they usually make $ on it. Sleazy.

Neal Grigsby said...

Thanks for the tips! I was in the market for a car earlier this year, and had all of the info about why competitive bidding is the way to go. In fact there is this lovely video explaining the whole thing:

But in actually getting down to doing it, I found the whole thing unsavory. I'm just not one of those types who love the thrill of haggling. I halted the process for other reasons, but the next time I'm in the market I will definitely check out the bidding service. Totally worth $200 to bypass the sleaze.

Adrienne said...

Congratulations on your new car!! We are going through this same process too.

The only 'problem' for us is the car I 'decided' on is going for anywhere from 2-5k *over* MSRP in California, because of its lack of availability/models manufactured combined with the fact that I can't wait another 8 months for it to be closer to the year end when they *might* be more available.

Consequently when one came up (because the original buyer backed out) within 4 months instead of the "6-10 months at least" wait that most dealerships said, I admit that we decided we're willing to pay MSRP.

Good thing I love the car.

New car!! Awesome!! Go you!

StinkyPunkButt said...

I bought a new 2008 Subaru some time ago, but the process was a little different. After test driving and settling on a model/configuration that I wanted, I contacted 8 or so dealers in the area through their web sites - dealing with their internet sales manager, like you pointed out - and got quotes from a bunch of them.

The lowest quote was a couple hundred dollars below the listed dealer invoice. This outfit was a high-volume Subaru dealer, so I'm sure they got their vehicles for cheaper than even that amount.

I went in to purchase the car and tried to lower the price more, but the dealer cut me off saying "I know I'm the lowest price around, we're not going any lower." And you know what? He was right. I bought the car.

Did I get a good deal? I think so, seeing as how I only got one $300 option. I certainly was happy with the price, and I didn't have to pay any more $$$ to a third party to negotiate for me.

I guess the moral of the story is: don't be afraid to do some of the legwork yourself. Using dealer websites it's pretty quick and easy to get quotes from many of them in your area. Even if you use a third party service, doing some of this yourself can help keep the entire process honest.

daniel: enjoy the Sube, they're great cars. :)

StinkyPunkButt said...

Oh yeah: Subaru also has programs where if you've been a member of a partner organization (such as the American Canoe Association) for 6 months or more, you can get any car for 2% below dealer invoice.

I didn't have the pleasure of trying this out before I got my car, but for everyone out there it's something to keep in mind.

Stefan Reitshamer said...

Awesome post! I did something similar, and got it done in half a day. One morning I called 6 dealers and told them the model and options package I wanted, any color, and I wanted to buy a car today. After about 4 hours and many phone calls back and forth, I ended up with a price $2k below invoice. She was reluctant to put it in writing, but finally faxed it to me.

It was great -- there was no haggling at a dealership, except for having to say no to all those "extras" (tire insurance etc) when I picked up the car.

Daniel Jalkut said...

StinkyPunkButt: That 2% below invoice offer is amazing! Good to know about next time I'm in the market, I will plan ahead and join one of those organizations 6 months in advance :)

Stefan: WOW! $2K below invoice? That's insane. Must have been some epic dealer incentives for them to be able to afford that.

Unknown said...

I apologize if this question makes me sound dense, but how does a cargo ship sail from Indiana to Rhode Island?

Daniel Jalkut said...

Erik, it's a good question. The Great Lakes provide, via a network of rivers and canals, access from these seemingly land-locked states such as Indiana all the way to the Atlantic.

But I have to admit I just assumed that they use these routes to ship cars. It's possible that they use another method. Maybe somebody reading knows for sure.

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