Post of the Day
October 26, 1999
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Foolish Car Buying Canuck Style
Well folks, last Friday I became the proud "owner-to-be" of a brand spanking new 2000 Jeep TJ Sport - Solar Yellow with black roof, trim, and tinted glass! I bought it the Foolish way, and am only an owner-to-be because it will take 6-8 weeks to build in Detroit, truck over to Toronto, on down to Halifax, then over to the Rock.
How do Fools buy cars, or more importantly, how do Foolish Canucks buy cars? Well, as with all things involving money and commerce we are forced to have to do it our own way - with help from our friends to the South of course. I suggest that your first stop be at the MF "13 Steps" to car buying at http://www.fool.com/car/Buyingacar.htm Since my present vehicle (Toyota Celica) is in it's 7th year and because I am too much of a car nut (and not Foolish enough) to buy a used car, what I am going to talk about is my experience at buying a new one. Also, since I bought a domestic model you may have to "adjust" these procedures to arrive at your price for an import.
1. Start with a maximum upper price, including taxes and registration - and stick to it! Resist any urge to have an open-ended upper price.
2. Forget the MSRP (Manufacturer's Suggested Retail Price, or sticker price). The dealer is "invoiced" by the manufacturer for the base price of the vehicle. It is this Invoice Price which is your starting point, and it is necessary to ferret it out. In the great US of A these invoice prices are published at sites like Edmunds, http://www.edmunds.com/ Unfortunately, such is not the case in Canada so we have to estimate it. A rough rule of thumb would be to take 10% off the MSRP. However, a more accurate way to estimate the invoice price is to take the percentage difference between the US MRSP and Invoice and use that percentage to calculate the Canadian Invoice Price. Generally speaking, the more expensive the car the larger the markup from Invoice to MSRP and they run anywhere from 8 - 12% or more. In my case it worked out to be 8.5%. Hence, with a MSRP of $23,045 - 8.5%, the Invoice Price charged my Jeep Dealer was $21,086.
|"What I did for options is to choose the ones I would like to have, and then rank-ordered them in the event that I had to give something up to stay within my price range."|
3. Auto Dealers have to finance their stock. In order to help them do this, the Manufacturer "holds back" 3% of the Invoice Price. The sooner the car is sold, the more of this Manufacturer's Holdback the Dealer will claim. So, by putting in a custom order, you give the Dealer more negotiation room, in my case $633. So I subtracted this Holdback from the Invoice Price and came up with $20,453 as the Dealer's Cost.
4. Ever wonder who pay's for all that advertising we see in newspapers and magazines, as well as on TV? Well it turns out that we the consumer do! Dealer's typically join a regional network for more localized advertising. You shouldn't pay any more than 2% of the Dealer's Cost as calculated in Step 2, and if you are a really tough negotiator you might get this down below this 2%. I allowed the 2% (I hate to fight anymore than I have to!) which brought the cost to $20,863.
5. Watch the "Freight and Delivery" charges - lots of room for shenanigans here! The Manufacturers negotiate two or three year contracts with truckers for delivery of their product on a country-wide basis. I don't know if this is done model by model, or across the whole product line. But the important thing is that it is a flat fee, called the Destination Charge. I got this from the new car price guide at the Canadian Driver website, http://www.canadiandriver.com/index.htm I knew that I should not pay any more that the $700 Destination Charge, which brought the total cost to $21,563.
6. We all know about the advertised incentives (e.g., $1,000 off or 1% financing for buying our Snow White Egalitarian Sedan this weekend only). But what we don't know, and what they don't tell us is that the manufacturer's are always pushing certain models at various times and offer the Dealer's an incentive to participate. No way of knowing whether there is an incentive applied to your vehicle so just subtract $500 for good measure. Why not? So, my final cost, before options, was $21,063.
7. Now for the options. Here is where you can "allow" the Dealer to make a bit of a profit, hopefully the smaller the better. Once again, say at the Edmund's site, you can get a list of all possible options for your vehicle, with both the Invoice Price and MSRP provided. Not so in Canada � at least not that I ever found. But generally speaking, markup on options varies between about 10 and 25% - the more popular and expensive the option, the greater the markup. Also, there may be certain "quick order options packages" that you can start with, but make sure you check out the cost of the separate components. Sometimes these packages are just way of loading you up with options you really wouldn't want to pay for otherwise. So, buyer beware. In addition, the US quick order packages, at least in my case, differed from the Canadian package. I did start with a quick order package because it included a light under the hood :>)
What I did for options is to choose the ones I would like to have, and then rank-ordered them in the event that I had to give something up to stay within my price range. This is why it is so important to have an absolute upper limit. Once I had my options package designed with the Canadian price equivalent of the MSRP for the package, I then took off 15% and added the resulting options price to my cost before options as calculated in Step 6. This became my opening offer. This offer, just to summarize, consisted of no markup on the base unit, and an estimated 10 - 15% markup on the options package. This opening offer came to $26,600.
8. Deal with the Sales or Fleet Manager, find out who it is and make an appointment to see them. In my case, I dealt with the owner of the Dealership. Pull out all the stops in terms of charm, rank, or whatever you have going for you. In my case, I had taught this woman in a course a few years ago. I didn't embarrass her by asking her what she got, but chatted casually about the University and what have you. I let her know I was very serious, that I had spent quite a bit of time on the internet doing some comparison shopping, etc. She knew without asking that I knew a lot more than the average person walking into the showroom. She knew, as did I, that she was going to give me a good deal and simple tack any loss on to the asking price of some other poor sucker who walked in ignorant and unannounced. But hey, I was there to look after myself and no one else, eh?
9. Lay out your cards, meaning your preferred model and list of options. Do not indicate your price yet but indicate quite clearly you have an upper limit. This reinforces in your own mind that this limit is for real. I did this by commenting as I listed my options that I wanted them itemized in this way so that if I had to I could drop something in order to keep within my price. I also causally mentioned during the discussion that I had a contractor lined up for first thing in the Spring to come in and do some renovations and therefore was working to a tight budget. She got the message. Remember, her profit was going to be all in the options so she wouldn't want me dropping too many!
|"Second only to taking my investment portfolio into my own hands, this Foolish car buying experience has been a real eye opener."|
10. Get the Dealer's opening offer. Be prepared to take it away and tell them you will get back to them. Get a fax number so you don't have to negotiate face-to-face. Also, this gives you more control over the timing of the process. In my case, the opening offer was $29,320. When I looked this over, with undoubtedly a "no way" look, she quickly said, "of course, we are going to give you a good deal." Made a big deal with her hand calculator and put two new prices in my hand, one with just the options I had listed, and one with a Quick Order options package plus the additional options from my list that weren't included. I looked more favourably at this effort, thanked her, and told her I would get back to her first thing in the morning - by fax (she preferred the phone but I said I would be quite busy).
11. Go home and put the Dealer's offer into your spreadsheet along with your own calculations (oh yeah, did I mention that a spreadsheet really helps make the calculations easier?). In my case, I had to add in the Quick Order package, eliminate the options that were part of it, and calculate their options MSRP (remember, this was their "profit"). I determined that the Quick order package was to my advantage, and in fact was a good enough deal that I might just be able to get all the options I wanted. Next morning, not too early so as not to appear anxious, I faxed in my $26,600 counter offer. After lunch I got another offer of $27,500. Hmmm, getting close now. All I needed was another $300 off and I would have my complete options package (plus the light under the hood!) and stay within my upper limit. I chose a really cruel tactic at that point. I waited until I got home at a little after 5:00pm, their closing time was 5:30. I phoned and asked if she were still there "by any chance" - and yes she was. Without too many pleasantries, I said we could "do a deal" for $27,200, otherwise I would have to go through my spreadsheet tonight , blah blah blah and figure out which option(s) to drop. The words were hardly out of my mouth and she said "we got a deal."
The final result? They came down $2,100 from their initial offer, I came up $600 from mine. I got all my options (did I mention the light under the hood?) and stayed within my absolute maximum. Did I feel good? You bet. No experience like it. My first thought? $1,500 more for some Nortel stock!
Second only to taking my investment portfolio into my own hands, this Foolish car buying experience has been a real eye opener. Hope the rest of you take the same tack the next time you set out to replace that old buggy of yours.