If you’ve read it once on the Internet, you’ve see clearly a thousand times: Conventional wisdom says the longer a used car sits on the dealer?lot, the much more likely it is you’ll get a good deal when you go buy it. People who’ve never invested a day in a car dealership like to armchair seller manager?behind their computers and write about things like “floorplan” and “holding cost” such as they actually know something about how exactly a dealer primary calculates them, and just how they affect prices.
If this conventional wisdom were actually wise, i quickly wouldn’t be writing this line. Unfortunately, it isn’t, and adhering to it can cause you to definitely waste a good deal of your time and money. Luckily, your friend Bark is here now to give you the real details on how, why, and when you should buy at a dealership.
Go ahead, click the jizzump.
There is some wisdom in saying that you can get a good deal upon aged inventory. Most dealerships typically cost their used stock high (somewhere around A hundred and ten percent of market price) for the first 30 days, and then adjust prices down as time goes on. The issue with this method is that the car almost never sells within that very first 30 days, and now the dealership has had to pay Thirty days worth of holding cost on the car.
What’s keeping cost, you ask? Easy. Holding cost is determined by taking the total cost of the used car department, including depreciation, opportunity cost, and interest.
Depreciation may be the easiest to understand: Simply take the wholesale value of the car when the dealer acquires it and subtract the at wholesale prices value of the car once the dealer sells this. Not rocket science.
Opportunity cost isn’t as easy to determine, nor is it as tangible, but it’s absolutely real. A dealer can calculate it by figuring out how quickly he is able to turn (or sell) a car on average, then figure out the net revenue he makes on a car. Let’s say the dealer turns his vehicles six times a year (or every 60 days), and he makes $1,500 a deal. That means each spot on their lot is worth $9,Thousand a year in profit. Divide that by 365 days, and that indicates each day that the seller is holding which car over sixty days is costing him about $24.65 in opportunity.
Regardless of whether you’re making use of your own money or someone else’s (usually referred to as a floorplan loan) to invest in your inventory, owning inventory is costing a dealer cash. Many dealers think that they don’t have holding cost because they don’t floorplan their lot – but they couldn’t be more incorrect. The capital the dealer has tied up in your inventory could be invested in another way that could be generating revenue. The dealer is throwing out that potential income to hold cars.
After a dealer has calculated all the expenses of his department, such as all the factors over, his holding cost per car, typically, shouldn’t exceed $30 each day. That doesn’t sound bad, except that when you figure that a dealer is intentionally pricing an automobile for a month at a number that gives him very little chance of promoting it. That?indicates he’s going to subtract the $900 loss from their front-end gross profit with that unit. Considering the average front-end gross profit on a used car is about $1,500-2,Thousand, that’s a significant loss.
By the time a used vehicle has been on a lot for 60 days, it becomes very difficult for a dealer to make any money on it. That’s why efficient dealers have a “hard turn” policy from 60 days: if the car hasn’t sold in which timeframe, it goes towards the auction or is sold to another dealer inside the group. Smart sellers realize that it’s better to take a small reduction than a big 1.
So what about those vehicles that have sat on lots for over 3 months? Wouldn’t the best deals be available on individuals?
Eh, not necessarily.
If your dealer truly understood the actual financial aspects of his dealership, that car wouldn’t be there. Except for some truly high-end automobiles, there isn’t enough front-end (which means the difference between the cost the dealer paid for the car and the ultimate value) profit built into the majority of used cars for that dealer to be able to make any money on a car that’s been on the great deal for 90 days or even more. So the very existence of this car on a car dealership lot means that the dealership likely doesn’t know how he makes money.
That’s bad news for you. Why? Because it means that seller is what they contact a “gross” dealer. Now, I know what you’re thinking – most dealers are gross. That isn’t what I mean. What I mean is that any dealer willing to hold inventory for that long is trying his damnedest to make front-end gross on each?and every vehicle, so the longer the vehicle sits there, the greater stubborn he’ll be about the price on it.
When I ask a badly run dealer what his average front-end gross is, I usually get one of 2 answers:
So you’re telling me that there’s a thousand-dollar variance? Or, even worse, that you don’t even know? You may be wondering how a dealer like that even understands if he’s earning money. I’ll tell you: he doesn’t. He’s hoping?that some dummy like you will come in and give him or her full pop with regard to his car. It is the “there’s an ass for every seat” mentality. Good luck obtaining a good deal from that guy.
Smart dealers understand that the best car to make money upon is one you turn quickly so you can reinvest that money in?a new unit. These people price cars fairly?from the get-go, and?understand?turning a?vehicle as fast as possible gives them which opportunity. Dealers like that know exactly how much money they create per car around the front-end, as well as how quickly they turn their inventory. They know that it’s easier to take a small loss at 60 days than a huge loss from 120.
Trust your Uncle Bark on this one. Use one of the third-party resources online that lets you know how long a car offers sat on the seller’s lot. If you see a dealer that has a lot associated with inventory that’s aged for 90 days or even more, your best bet is to appear somewhere else as he is still hoping to make a few gross profit. Look for a dealer that’s turning his inventory quickly and efficiently, and look for cars that are about 60 days old – that’s the best choice to pay a fair cost.
I realize that’s not what every other car buying article on the Internet states – but they’re incorrect.