How to buy a car and get the best value for your money (Part 3)

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Image source: http://www.wikihow.com/Buy-a-Car

Although the year is still only a little more than half over, in the auto world, it’s already 2015. With the exception of a few 2014 orders that are just being delivered, all the vehicles being delivered at any dealership from Boston to Sacramento and beyond, are 2015 models.

It’s true that there are still many 2013 and 2014 models on dealers’ lots, but they are leftovers and present a bit of a problem to dealers – which makes this a great time for you to be in the market.

You see dealers only have so much space available. If the dealership has five acres of land to play with (plus off-site storage that’s usually much more expensive than on-site stowage), it may allocate three acres for new cars and two acres for used cars. Because the off-site costs are high, there’s a big incentive to move the off-site inventory to the sales yard outside the dealership as quickly as possible. When it arrives, the 2015 stock goes into the off-site storage for a little better protection from the weather.

Sales Pipeline

This is not as confusing as it might seem. Think of it like a bowling match. You have the front pins (older models) in position to go down (be sold) first. Then there are the newer cars (this calendar year models) in back and, finally, there are the new year vehicles drifting into yard storage and acting as the back line of pins. They move forward as the old pins (cars) are knocked over and out of the game (sold).

The problem for the dealer is the pipeline. The majority of cars now arriving are 2015 models. They need more and more lot space for storage as the sales pipeline quickly fills. But there’s the occasional special order 2014, built to order near the changeover to 2015s.

That’s why, if you are going to go for a new car – newness depends on how you define it – this is the ideal time to be in the market.

“New Cars” Explained

Can a 2013 model be new? If there is a 2013 model unsold and still sitting on the sales lot, it is new to you and you can bet that the dealership will cut its prices to the bone to move it out so you can have your new car. To the dealer, of course, it is an old unit — a funny contradiction.

One advantage for you is that most of the early depreciation is gone. So you save, while the dealer has to absorb the loss in two years’ depreciation. In a profit sense and ignoring the depreciation, the older vehicle you buy represents a real cost since it is two car-years old.

During the two years it has been on the lot, moving from spot to spot, the dealer has had an appreciable investment in floorplan money. This is the money dealers use to buy the cars from the factory. Dealerships, contrary to the thinking of many, are not consignment shops. Dealers buy every car on their lots, so every cent that they spend keeping older cars is a drag on the books. They pay monthly or quarterly payments to their credit sources, just as consumers do to banks or credit unions. So if a car stays on the lot for a long time, it is just an expense for the dealer.

If you look through www.edmunds.com and do a search for “new car costs”, you will see what it costs a dealership to store an older car and you will find out why it makes sense to push the sales envelope just to move these older cars out.

As an example, suppose a local dealership has two or three still-new cars. They have never been registered and are still on what is known as certificates of origin or ownership, i.e. they are still dealership property. The dealer counts days on lot (DOL). Let’s say they are better than 500. Each day they have sat, the dealer paid interest on them, so you can see that if a salesperson was able to sell one of them, the dealership would be more than a little grateful.

Selling any of these cars is a win-win-win. The buyer, of course, gets a still-new, depreciated vehicle, while the salesperson will likely be given a higher commission or a bonus for selling the car. Some salespeople specialize in selling long DOL models because they tend to pay the most money. The dealership wins because a vehicle with a huge DOL figure is now off the books and the capital tied up is freed for other uses.

Deals Get Thinner and Thinner

As older cars become fewer or get down to zero, the sales picture moves to the newer market – models with shorter DOL figures. At this point, while still better because the vehicles have some extra time on lot, the deals begin to get thinner and thinner for the salesperson. This is the person in the middle, who usually has to take the hit for a vehicle that is “new, but older”. Sometimes, the buyer ends up paying more because the dealership tries to maximize the sales.

But there’s a balancing act here. If the dealership gets too greedy, the prospective buyer will walk away from the “great deal” and will either hold onto the vehicle they already have or will buy elsewhere. In this case, it’s poor sales management that costs the dealership the deal.

A “new, but older” car is anything from about 100 to 200 DOL. The salesperson and buyer can make out a little better if the deal is structured to produce both a happier salesperson who will work harder, and a potentially loyal customer who believes the deal is excellent. In such cases, the dealership realizes more money than it might otherwise have.

New-car Selling Ground

At this point, the dealership is moving into the area it wants to be. The DOL figure might be from 75 to 150 which means the cars being sold are the current model year (as this is written, it’s soon to be last model year when the 2015s are officially for sale). It’s the newer-car selling ground where the dealer really wants to move product out and expects to make the most profit. Salespeople expect to make lots of money on these vehicles, too, but the truth is they often do not. Many of their deals tend to be minis, offering anything from $25 to $100 on the commission sheet.

This time the person who can benefit the most is the consumer. The dealership still has to get rid of last year’s models because it needs the floorplanning money and lot space. It only maximizes its revenue when all the new cars are on the lot for the start of the first “sales” of the new car year.

Did you ever notice that almost as soon as the new-car year begins they advertise “special” sales or month-end specials? It would seem a tad counterproductive to put the newest models on sale. Here’s the sad truth. They are not really on sale as you would think of a sale. It’s an incentive to get you onto the lot so the salespersons have a chance to work you into the new car.

This is when they make the most profit on their vehicles, while salespeople have to survive on moving volume. If you want to see the profit structure on a new car, take a look at the infographic for more information.

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