Sunday, June 10, 2012

Negotiation for a New Car

How do you feel about negotiating prices? I know there must be some people who enjoy haggling, but I am among the many who find it stressful. This applies to all sorts of situations, from buying a cheap bracelet in an Istanbul bazaar to buying an apartment to certain business deals. Now I have discovered that I hate it even when I am not directly involved!

Let me explain. A friend, who I will call Consuelo, is buying a car and I have inadvertently turned into her coach. When she started telling me about her last car purchase, which was her first, we both had to laugh about all the things she'd obviously done wrong. And this was over 10 years ago, when the online resources we have now weren't as extensive. She did research car models via Consumer Reports, and went shopping at a time when dealers would be trying to clear the previous year's models off the lot, but then when she was first offered a price and it seemed kind of low enough, she didn't even try to negotiate further, and then she got bamboozled into paying for some additional options and an extended warranty she didn't need.

I have never bought a car myself-- and as a New York City resident, I probably never will-- but of course I got interested in the topic and offered to use my online Consumer Reports access to help her figure things out better this time around. She already had a specific car in mind so I pulled the pricing info that helps you calculate a reasonable target price to bargain towards. It's not just the dealer invoice price-- you have to factor in incentives and dealer holdbacks to calculate how low the dealer can really go and still make a profit of 1-5%. It's great to have this information, but then you can't help worrying that paying anything over that amount means you are being ripped off.

I gave Consuelo all the numbers and talked through all the sorts of approaches that are recommended when dealing with car sales people. Basically, you want to do all your research in advance, know what you want and what you can be flexible about, and have a target price in mind for the car you want. You should make this clear up front and try to set up a bidding war between multiple dealers who have your desired car on the lot and want to unload it. You want to do as much negotiating as possible over the phone, not in the showroom. You have to go to the showroom to test drive the car, but you should make clear that you are still at the stage of testing different models and aren't there to buy right away. Sounds pretty straightforward, right? Well, it's a lot easier in theory than it is in reality!

I went with Consuelo to a dealership to test drive the car she wanted. We walked in without an appointment and were helped by a nice female salesperson who I'll call Debbie. Debbie sat us down while she made a copy of Consuelo's license and got the car ready. (Meanwhile, who knows what else was going on while we waited those few minutes. They might have pulled a credit report on Consuelo, though they aren't supposed to do that.) Then we went out for a drive. Debbie pointed out some nice things about the car but without any sort of hard sell. Somehow we ended up talking about how female car sales people are becoming more common, and how some female customers prefer to deal with women and some men refuse to. She told us she'd only been selling cars for a few months. When we got back to the showroom, Debbie sat us down and showed us a brochure about the latest model of the car, asked what color Consuelo wanted, etc. She wasn't pushy or high pressure, but she gently drew Consuelo into revealing more about her preferences than she should have. Consuelo said she wanted the previous year's model, in a certain configuration, and Debbie started looking in the inventory system for it. She didn't have the exact one in stock but said she could order it easily, with only a $500 deposit. Consuelo was sitting there biting her lip as if she might just do it, and was only reluctant because she hadn't seen the color she liked best in person. I was the one who had to interject that she could just look around a bit more to see if she could see the car elsewhere, and take Debbie's business card and come back later. In my head I was saying "Snap out of it, Consuelo! You're supposed to be playing hardball here!"

Afterwards, we discussed how things had gone. Consuelo liked Debbie and because the dealership was convenient, she wanted to buy the car there.  No discussion of price had occurred. I felt like she'd gotten off on the wrong foot-- she'd let Debbie establish a feeling of trust, and she was allowing herself to be influenced by factors less important than getting a good price, although I could understand that there might be enough value to those other factors that she'd compromise on price a little for them. So the next step was searching other nearby dealers' websites to see if we could look at the right car in person, and start getting some price quotes. I already figured that if Debbie had to order the car from another dealer, the price would probably include two dealers' profit instead of just one, and that a dealer with the car in stock would be much more incentivized to make a good deal. Consuelo emailed Debbie and asked what her price for the car would be-- pretty much just like that: "Hi Debbie, what would your price be for the car we discussed?" To me, this was her next mistake-- she should have put it all in context, saying that based on her research, she was looking for a price of $X, and if Debbie could give her a good price, she was ready to buy. But having left it open-ended, of course Debbie came back to her offering a price of only a few hundred dollars under the MSRP. Consuelo forwarded the email to me and said, "This seems high."

I decided to help her a bit more proactively, thinking it might also be a good idea if some searching was done under my name rather than hers. I found the car at another dealer not far away and submitted a request for a quote, and also sent Consuelo a link to yet another dealer who had the car so she could request a quote herself. The dealer she contacted gave her a very good price, only a little bit more than the target price from Consumer Reports, and specified that it included the destination charge, which was around $800. I told Consuelo to verify that they would not be tacking on a bunch of other fees CR warns you about, and meanwhile, she went back to Debbie with the lower quote, adn asked if her price had included the destination charge.  Debbie replied that it had-- though I am sure if Consuelo had accepted that price without questioning fees, she would have been told that the destination charge was additional. Debbie did not offer to match the other price, but instead said something cryptic about how she understood that price was important. We weren't sure if she was just saying she couldn't negotiate further or what-- I suspected that she sensed Consuelo wanted to buy the car from her and was not going to give an inch unless she had to. This time, I had to say it out loud: "Consuelo, Debbie is very nice, but she is playing you like a violin. Don't take it personally-- it's her job."

Meanwhile, the other dealership replied that there were no additional fees. It was all sounding good, so Consuelo made an appointment to go in and see the car without asking if any further price reduction was available. The earliest she could get to that dealer was a few days later, and by that time, it turned out the exact car she wanted had been sold and they didn't have another one like it. So much for leverage (especially since Consuelo forgot to ask if that dealer would honor the same price when they offered to order her the same car from somewhere else). Another dealer had a price a little closer to Debbie's, but we were starting to worry that since there had been some big sales over Memorial Day, fewer and fewer examples of the model Consuelo wanted were showing up in the inventory at local dealers. I figured Debbie would be well aware of this, so Consuelo had less and less negotiating power.
Finally, after a couple of phone calls with someone at another dealership who sounded like the stereotypical sleazy car salesman, Consuelo just decided she was sick of the whole thing, and by that point, I really was too! I'd been thinking so much about all these negotiating strategies and trying to help Consuelo get the best possible price, but that seemed to be less and less possible, and the idea that her desired car model would sell out in the meantime was adding a lot of pressure. By this point, we knew she wasn't going to be all that close to the target price CR had fixated us on, so we felt like we were somehow failing at the whole thing and getting screwed. I was trying to be a good adviser and coach, but ended up taking it so personally that I got really anxious on Consuelo's behalf and was having nightmares about car negotiations! Ultimately, Consuelo told me she was just going to write back to Debbie and say she wanted a price $1,000 lower than Debbie's original offer and could she do it or not. I told her to ask for $1,500 lower and that Debbie would then come back to her with the $1,000 lower price-- which was exactly what happened, so Consuelo thanked me for reminding her not to negotiate against herself. The price did end up being a few hundred dollars below invoice, so it wasn't a terrible deal-- it was an average deal, an acceptable deal-- but it was disappointing not to get the very good deal I thought she should aim for. To put this all in perspective, the price range we're talking about between best feasible price and MSRP was about $32,000-$36,000, and Consuelo's paying $34,000-- but even when you're buying a $34,000 car, it's painful to think someone might be cheating you out of $1,000!

Of course agreeing on a price isn't really the end of a car purchase negotiation-- it's just a step along the way. But this post is getting long, so I'll write a sequel soon covering the rest of the process, including negotiating a trade-in allowance and financing. Consuelo hasn't actually gotten the car just yet, so there's plenty that can still go wrong!! And I'm learning a lot from her experiences along the way.

I'd love to learn more from all of you too-- have you bought many cars in your life? what price range? How did you negotiate? Did you find helpful information online? How good a deal did you get?


Early Financial Freedom said...

I bought a new car about 6 years ago. It was an SUV with a price range of $32k - $36k. My inner buying process took a few months.

-First, I mentally selected the car I wanted, did legwork; read reviews, found out about CR suggested price range, etc.
-Second, I requested quotes from 3 local dealers VIA email. After initial back and forth, I selected the dealer from which I wanted to buy the car.
-Third, I negotiated add-ons, final price, etc. I even asked for a list of total costs with dollar amounts! Up to this point, all happened VIA EMAIL, no visit to the dealer, no phone conversation, etc.
-Fourth and final, once I agreed to all, I visited the dealership, signed up the papers and drove the car home! I suspect that salesman had spoken to the finance officer about me prior to signing the papers, so he did not even bother to sell me the usual extras. This was the best way of buying for me since I very much dislike dealers and their sales tactics.

Anonymous said...

I always lease cars, which is a little bit different from buying in terms of the negotiation. My father is really good at negotiating, so I always bring him with me when I get a new car, and I've gotten fantastic deals. I hate to give in to the sexism, but car salesmen really try to take advantage of female customers, and it helps to have a man present.

I think one of Consuelo's mistakes was letting on that she had already decided she wanted that car. If I'm not 100% ready to make a deal, I tell the salesman that I want to look at cars X, Y, and Z before I make a decision. They still try to offer you a deal (and of course claim that it's only good if you buy the car right now), but it's pretty easy to deflect the pressure by saying you are still looking at other cars.

Caryn said...

I hate the idea of leaving a negative comment, but you've gone about this all wrong. I'd hate to think someone might google this post and think this is how it's done. Your friend really needs to talk to someone with some car buying experience ASAP! I wish I could explain it to her in a comment, but it's too hard commenting from a phone. I usually appreciate your posts, but you're completely out of your element on this topic.

Crystal @ Prairie Ecothrifter said...

I worked for a car dealersip software company from 2005-2011, so I could see the deals from the dealerships' perspectives. Here is how it boils down:

1. Figure out your happy price. The price that you can be happy with and that is generally acceptable to dealers. I use Kelly Blue Book.

2. Find outside financing. You can still tell the dealer you are financing through them, but now you know how low they have to go to earn the business.

3. Haggle for the price online or on the phone with dealers so you can use offers to work back and forth for the best deal.

4. If you want any extras like extended warranties, remember it is all negotiable. Never pay full price for add-ons.

5. After working out all of the details using their best financing rate, if it isn't as low as the one you got from outside financing like a credit union, just let them know that the deal is good to go but you will be paying in cash from the outside financer. That will get you the best terms.

It took 3 hours in the dealership (didn't know to do it online at that time), but I was able to get my husband's 2007 Prius in 2008 for $21,500 instead of $28,000 like they were asking or $33,000 like the new ones were going for. This was while Prius' were on waiting lists and gas was reaching $4 a gallon here in Houston in 2008 (that's the worst it's ever been here). He still loves his car and I loved the fact we were able to pay it off in 2 years. Hopefully it'll be our last car loan for a long time.

Madame X said...

Caryn-- as always, I make no claim to be giving expert advice on this site. I tell stories about my experiences (and others') with money-- good and bad, successes and failures.

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Anonymous said...

I enjoyed this story. I love haggling, and this past year in the Middle East my husband and I bargained up a storm and came back with souvenirs that we are really happy with. That of course is different than car buying, but I am one of those people who will ask at hotels for example if there are any discounts available, or in general will see if prices are totally firm. You have to see it as a game, and if you do, you will see that generally prices are lower for the consumer when haggling is permitted. This has been shown, by the way, in many studies. In terms of car buying, though, what a drag! One of the other commenters had some good tips. I just hate going around to all those places, maybe because I'm not a car person. I do think, though, that instead of being stressed out because they are "cheating" you, the best idea is to think about it as a win win, and that you are getting something you want, and they are getting something they want. But that means you have to do your homework, make sure that you are buying something you really want, and at a price that is acceptable and favorable to you. It can also be acceptable to them and favorable to them. Just my 2 cents.

Merchant Account Provider said...

Buying a car for a fair price is quite difficult. Car salesmen are specially trained to negotiate. I used to be one myself, actually, so I am quite familiar with their style!

No matter how much you dislike haggling, you do NOT accept the first price. When I was in the business, I would always charge at least 30% more than the price I was willing to let the car go at.

One should always keep in mind that car salesmen have the ability to figure out who is buying a car for the first time, and who isn't. They know who to target as prey, and who to not bother with their act.

I am really glad you advised your friend to carry out sufficient research before she made the final purchase.



Abby said...

I'm a hopeless negotiator. I'm looking at buying a car in the next six months and I already know I'm bringing my dad along to assist.

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Connecticut Blogger said...

When I buy my next car, I'll go to a single dealership to test drive the car and ensure that's what I want. I'll then email all the area dealers in my area and tell them exactly what I want, then ask for their best price, inclusive of all fees.

Car dealers will usually ask if you'll be financing with them and i usually put them off by saying i want to focus first on determining what their price to me will be. I don't reveal until that price is set that I will, in fact, be paying cash. I paid cash for my last 2 cars, but i think if i let them know early on that i wouldn't need financing (and thus, a lost opportunity to them to make more money off me) they might not be even more tight-fisted with the car price.

Anonymous said...

Madame X,

What should one target paying?

If MSRP is M, and invoice is I, in an ideal purchase what should one target?

How much is dealer holdback? How does one find it? What effect does it have on the sale price?

Sorry for the ignorance. If there are sites that answer the above questions, particularly about holdback, please point to them.

Thnaks in advance!

Anonymous said...

You haven't posted since 6/'s been almost a month, anything new? I know you have a b/f now but can he take that much of your time....I'm married and make time to talk saving money.

Bo Manry said...

It's always smart to go into a negotiation with a set price you will be happy with, and then a price where you will walk away. The goal is obviously to get the lowest price possible. I found that threatening to go to another local dealer, gets the dealer more willing to lower their price, when they previously wouldn't.

Jennifer said...

Wow!! Something unique got to read after ages. I agree there are several determining factors like Dealer Invoice, Advertised Rebates,Dealer Incentives,The Advertising Charge, the hold back and so on that denotes a successful buying of a new car. I have recently went for my brand new Honda hence had to go through a lot of hazards before buying it. :) Thanks a lot for sharing the tips.
Jennifer Goldblum