Buying, Selling & Trading - The Automotive Process
December 1, 2007
By Scott Lewis
Last month I took a financial
look at trading in a car vs. selling it privately. Most people
don't think of the tax break when deciding between those choices. In the
article I show there is very little financial incentive to sell
This month I want to take a deeper look at the entire buy - sell - trade car process. Below I will mention some specific numbers (that are factual) and some rumors (but hard rumors that are important to know). In the end I hope this is an informative article that will help many people with any or all the tasks of car ownership.
I am a car nut. I think about cars far too much of the time. Although I don't drag cars into conversations I love to get into automotive related conversation with friends and coworkers. I love old cars, and will someday buy another classic. My love for cars is drastically hindered by their cost. This is one of the reasons I love computers so much. A computer hobbyist has a far lower budget than an auto hobbyist. So it pains me that the auto industry is such a scam.
The auto industry is the single worst retail marketplace, bar none. Here me out. The saying usually goes, for the vast majority of the people a car purchase (particularly a new car) is the second biggest individual purchase they will make... next to a house. So why isn't the house market worse than then the auto market? After all there is a ton of profit to be made by the builder of a house. The reason why is simple, houses usually appreciate in value while cars do not. We will not discuss classic and collectible cars here. This article will cover new and used vehicles that would be used for daily transportation. To keep things reasonable we are looking at the automotive marketplace for cars with no more than 100,000 miles and no older than 15 years.
Why the scam? New cars are one of the very, very few new purchases that you will negotiate on price. Yes, you may try to get Best Buy to cut a few dollars off that plasma big screen TV, but generally you price items out and pay what the retailer is asking. Auto retails (dealerships) all negotiate. Yes, some new ones are doing the "menu" pricing where they put a set price on the vehicle, but that price is supposed to include some discounts that WOULD have been negotiated. This is working well for many people. The single worst experience in shopping for a car is the negotiation process, and the reason many people actual hate going car shopping.
So, the price is not set in stone. You can negotiate it. Some people are better than others at negotiating. And there in lies the scam. Did you really pay the best price for your car. If you did not, when it comes time to sell or trade that car you are competing with the guy that did get the best price. I have never heard of a home builder that has bought a football team with the profits from their business. In San Antonio there are two owners of car dealerships that own profession football teams. Red McColms has a string of dealerships in this town and he owns the Minnesota Vikings. Tom Benson also owns dealerships in San Antonio and he owns the New Orleans Saints. These guys are mega millionaires because they make thousands of dollars off every person their dealerships sell cars to.
If you get taken on a house you at least have the advantage that the vast majority of houses go up in value over time. You can just ride out any dips in the market until your house finally appreciates. Cars will not appreciate for a very long time, and even then it is hard to predict which cars will and won't be collectible enough to rely on that. Certainly within our 15 year/100,000 mile guide line your car will depreciate.
Tax, Title and License. These are words everyone knows. Title and license are minor costs that are par for the course in buying a car. Usually around $200 or so. We will not concern ourselves with this minor financial burden here. Tax on the other hand is a government mandated scam. That's right sales tax on automobiles is a scam. Guess who wants this. The dealers! Why? Because it locks them in for your business.
Here's how sales tax works for cars. When a car is sold new sales tax is collected, as it should be. Then, as we learned last month, when you trade in your car the value of your trade is deducted from the new car price and you pay sales tax on the difference. This is a good thing. You get a tax break on your new car purchase. The end purchaser of the trade will pay sales tax on the used car purchase. All is good. Or is it?
Since the dealer is going to raise the price of the used car to make a profit, the government is going to get more tax on the used car than the tax break that was provided. The government actually benefits by giving this "tax break." Part I of the scam.
What if you sell you car privately. Well, the new owner of this used car will have to pay sales tax on it when he goes to license the vehicle. Part II of the scam comes from the government collecting sales tax for an item that already had sales tax applied. This is the only industry I know of that does this. Collecting sales tax again and again and again as an item changes hands.
Remember, when you sell your car privately the buyer paid the sales tax on it, yet you still have to pay sales tax for the full price of your new car. The government is getting paid twice. Part III of the scam is that only when going through a dealer do you get that tax break. So you are lock in to the dealerships if you want to minimize the government's three part scam.
How should it work? You should be able to take a receipt for a car you sell with you when buying a car and have it turned in with the new car purchase so that you get that same tax break. I can see it now... some automotive lobbyist presents this "tax break" to a politician. The politician runs with this tax break for the people that ends up costing the people more money in taxes and even more money for car purchases, because going to a dealer to trade in your car is a massive money loosing proposition.
Buying a car. The Internet has matured quite a bit over the last decade. But you still can't buy a car over the Internet. I wrote about this in February 2000, almost 8 years ago. And it is still true today. There is no way to eliminate the dealership from the new car purchasing process. Another government scam backed my lobbyists working for multi-millionaire, football owning dealers. The government makes it illegal for a manufacture to bypass the dealership network... a network that the manufacturers funded the start of... and sell cars directly to customer. In this day of GM and Ford loosing money hand over fist you know they would love to collect some of the profit the dealers are getting. Maybe this is Part IV of the scam.
So you have to buy new cars from new car dealerships. And we know they all negotiate in one way or another. If they use "menu" pricing they do this because they are going to low-ball an offer for your trade. Depending on the value of your trade you are stuck with this because of the tax scam above. If the sales tax in your area is 8% then you need to sell your car privately for more than 8% over what the dealer will give you for it. Dealers always low-ball offers, because they know you are stuck. I find it amazing that dealers selling used cars will quote NADA prices for the cars they sell, but they ignore NADA prices when buying your trade. Anything they can do to make a very large profit.
If you sell your car privately you have to compete with the dealerships. All dealerships advertise in the the major automotive web sites like Autotrader and Cars. Plus they advertise in the local newspaper. This means you have to price your car for sale significantly below the price of what dealers are asking. After all, you cannot finance someone else. You are leaving the burden of acquiring financing to the buyer. The buyer realizes this and that is one of the reasons he is willing to buy from a private seller, and expects to pay less for his trouble. In the perfect world the buyer and seller on a private party transaction each make out better than they would going to a dealership. However, dealers do make it much easier to do this. You know they will take your car... even if they low-ball it they still take it.
Unfortunately this is not a perfect world. If you have to lower your price too much you negate the financial benefit of selling privately. This is pretty much what I discovered last month. In fact, I suggested you trade in your car last month.
So, even though there is the chance to gain something by selling privately, I recommended against it last month. I have been trying to sell my 2006 Mini Cooper S Convertible. I have not been successful. There are two major reason. First is mileage. I have a daily commute of about 80 miles a day. These really are easy highway miles. But my car has the highest mileage of all the cars on either site I advertised it on. This meant I had to low-ball my asking price to make sure it was lower than anything else out there.
The next problem with trying to sell my car is that it is a niche market vehicle... twice. It is a premium small car that sells in low numbers. There is not a huge market for them. Add to this it is a convertible and I am selling it in the Fall - Winter time, a bad time for convertibles.
O.K. You want numbers. I am not to proud, so here are real numbers. I
was trying to sell my car for $24,000. I owed more than $25,000 on it
and could not afford to sell it for less. I got three price quotes from
dealers as a trade. One each for $19,000, $20,000 & $21,000. The $19K
offer was the most insulting. The $21K offer came from CarMax.
Unfortunately, this is not enough to help me out. At $21K I would be
getting a tax break in the $1,300-$1,400 dollar range, but only if I
bought a car from CarMax. That means I would have to get at least $22.4K
for my car to break even on selling it privately. This leaves me too far
"upside-down" on my loan. And remember, you only get the tax break if
you buy a car from the same place that you trade it in to. hence the
trap in the government scam.
I managed to get a little information while trying to sell/trade/buy a car. For starts let's pick on CarMax. I kind of like their operation. They were closest to honest with me on my trade. When they gave their offer they showed me the Kelly Blue Book value of the car in good condition as $21,500. So they were only $500 below "book" value. There is lies lesson #1. Never assume you will ever get excellent value for your car on trade. One of the other dealers tried to tell me that the car may seem excellent "to me," but that it is not necessarily excellent. I found this the most insulting because this was the dealer that offered the lowest price for my car, and their car, a used 2007 G35 ($28.3K, 12K miles), was in worse condition than mine with some serious wear issues for a car with so few miles.
Sticking with CarMax for a second. The salesman was "talking cars" with me in general. He told me what he drove, and what he was looking for next. He also mentioned he just needed to keep his payments the same (or lower) so that his wife would let him get another car. And then he let it slip that his discount on a car at CarMax was $3,000. That means CarMax has to be pricing cars at least $3,000 over what they pay. Consider they probably have to work in some basic expenses (paperwork, time, prep, etc.) I would take an educated guess that they price cars about $4,000 above what they pay.
The dealer that gave the lowest offer for my car above also let it slip they expect to sell a used car for $4,000 profit. Granted, they can always shuffle your car off to a wholesaler. This is a very bad thing if it needs to happen. If your car goes to a wholesaler three sets of people need to make a profit. The dealer selling to the wholesaler gets a profit. The wholesaler with sell or auction off said vehicle to a "smaller" dealer and make a profit. And the smaller dealer must make a profit when he sells it to a final customer. Keeping in mind that many smaller dealers have to keep their prices low to compete with the bigger dealers and that means the car will ultimately sell for a lower price meaning all the people above will be going with lower numbers.
So, dealers expect to make $4,000 profit. Personally I find this disgusting. It makes me hate myself for being a car nut. Remember the dealer that wants to make $4,000 profit off you and your trade probably made more than $4,000 profit on the new car you bought. That just makes me sick. It also makes me sick that nobody can do anything about it since the government has forced this on us. With such huge profits at the dealer level it is amazing that someone doesn't come up with a way to eliminate some of the cost and trim profits to sell in volume in some way. The Internet should be filled with places that are willing to remove middlemen and clean up. You can buy so many things online for less than walking into a big retailer. Why not cars? Thanks Uncle Sam!
In my case I was selling a car worth low 20s and buying one for high 20s, so at a lower end of the price scale profits would have to be significantly lower.
Resale Value and Loans
Here is a thought I just got... and actually inspired this entire article. Never roll TT&L into your car loan. As soon as you do you are instantly upside-down on your loan the cost of TT&L. Let's used some hard numbers. I paid $30,300 for my Mini Cooper. This is only $450 off sticker price. Granted, they had very few cars available on the lot and many, many more were waiting for customer who ordered their cars to pick them up. Minis are in high demand new. With TT&L I ended up financing something very close to $33,100. That means I was upside-down on my loan by almost $3,000 the day I drove it off the lot.
Look back at the numbers above. I wanted $24,000 for my car, and got a best offer of $21,000. Had I put $3,000 down when I purchased the Mini I would be getting very close to payoff value from CarMax after only 1-1/2 years and a ton of miles (over 28K miles so far).
I can't believe I never thought about it this way. I have rolled TT&L into every car loan to date. This is obviously a common practice. Don't do it!
As for calculating resale value, I don't no any perfect way. I can tell you that NADA and KBB are not that great. Here's and interesting example. I went to Infiniti's web site. They offered a link to determine the value of your car. I clicked it and was redirected to a placed called Intelliprice. I went through the steps for my car and I received numbers in the $16-$19K range. I thought that odd, so I did a search for Intelliprice and found their web site. I went through the exact same screens to get a value for my car and it gave me a range of $19-$22K. Wow! A three thousand dollar difference just because of how I got to the site. I wonder if Infiniti asked for this feature, or if they know that the value given a potential customer is being lowered when going through their site. Interesting.
Here's my current rule of thumb for determining resale value. Search for your own car on AutoTrader or Cars. Find the cars that matching yours as close as possible being sold by a dealer. Then select the lowest priced car. This is the "street price" of your vehicle. Subtract $4,000 from that figure and that is what you can expect to get on trade. Let's test this formula.
I just looked up my 2006 Mini Cooper S Convertible on AutoTrader within 100 miles of my zip code. I found 3 cars with this information:
14,175 miles, $26,500
27,662 miles, $23,977 (reduced)
33,685, Unlisted Price
We take the lowest price, $23,977, and subtract $4000. We get $19,977. This is right in the ballpark of $19-$21K I was offered. See, it works!
I don't have exact figures for other cars, but I would expect to increase the spread with more expensive cars. I would add $1,000 for each $10,000 in price range. For instance, if your car's "street price" is selling in the 30K range then I would lower the street price by $5,000, if your car's street price is in the $40K range lower it by $6,000. At the other end I would guess that you should only lower you car's street price by $3,000 if it selling below $20K.
Recap - Do's and Don'ts
I wish I could provide a list of all the things you can do to get ahead, but I can't. I do have a few items that you can rely on"
There you have it. I hope this has been informative. I plan to use this information when I buy my next car.
Gee... I haven't covered that in a while. What would be my next car... after a Mini Cooper?