True Dealer's Cost and Making Your Offer
CarBuyingTips.com will show you how to figure out how much the dealer paid for the car. To help do this, we will use the same free sites from Chapter 2. I have also created a free "Offer Spreadsheet" that will calculate a fair offer for both you and the dealership. Once you fill it out you'll be able to use it during your negotiations.
How Much is Fair to Offer the Dealer?
In order to calculate your offer, the first thing you have to do is find out how much they paid for the car. Then you will be able to offer them a deal that gives them a fair profit. Don't just make up a number for the offer, make an educated offer based on the dealer's actual cost. It will take some time and research so you must be patient. At the dealership, one of the first things you should do is ask them to show you the factory invoice for the car. If they refuse your request, I will show you how you can get the information online.
Your Offer Should Be 3% - 5% Over Actual Cost
To be fair for both sides, you should make an offer of 3% - 5% over the actual dealer's cost, not above the invoice price. Dealerships will gladly accept a 5% profit. In fact, many dealers survive on 3%. I have done extensive research with auto industry insiders and have verified this to be true. You will find that a lot of dealers will charge dealer prep fees and advertising fees to offset their expenses. Meeting sales goals will also bring income to the dealership in the form of incentives from the manufacturer and these incentives further offset their costs.
Their bread and butter is taking advantage of uninformed buyers. Don't misunderstand me and think I'm saying that they shouldn't make any profit, I'm just saying that it needs to be fair. They make additional money from trade-ins, credit insurance, finance, accessories, extended warranties, rust proofing, etc.
Dealer Cost is Not the Factory Invoice Price!
The dealer's actual net cost of the car is usually much less, made up of 3 parts:
Invoice Price - Factory Holdback - Factory To Dealer Incentives = Dealer's Actual Cost
How Much Did the Dealer Really Pay for the Car?
Magicians have nothing on car dealers when it comes to keeping secrets and how much they actually paid for the car is their most important secret. You'll hear a lot about the "factory invoice" and the salesman will try to make you believe that it shows their true cost. Don't fall for this pitch because it's not correct. Knowing the true cost is your most powerful weapon when negotiating with the dealer.
CarBuyingTips.com Explains Factory Holdback
Dealers are charged a "Holdback" by the manufacturer. If you aren't shown how much it is you can estimate it as 3% of the invoice price minus destination and delivery for domestic cars, 2% for imports. The dealer gets the holdback from the factory after they sell the car. It will be subtracted when you calculate the true cost.
Factory To Dealer Incentives Uncovered
There are hidden factory to dealer incentives built into the "invoice price." They can be huge and they reduce the dealer's effective cost of the car.
Do not confuse these with factory to consumer incentives (better know as rebates). Rebates are paid by the factory to you or they are subtracted from the final price. The rebate amount should be subtracted after the price is agreed upon.
The Factory Invoice Explained by Jeff Ostroff
The factory invoice lists the base model of the car, all option packages, floor mats, body trims and destination charge. For most manufacturers it will list the holdback (sometimes it is abbreviated as H/B or something similar). If the holdback isn't listed then estimate it. To make sure the one the salesman shows you is real, compare the numbers with your research. Make sure not to confuse the MSRP on the window sticker with the "invoice" price!
Note for Honda Buyers: To maximize dealer profit, Honda options are installed at the dealer. Unfortunately this makes it impossible to lookup the cost of these options. Use Toyota's option pricing as a "competitive guide" for negotiating.
Invoice Price is the Amount the Dealer Paid not the Cost
This can get somewhat confusing so the best way to understand it is to think of it like a rebate you get from a product. If you buy something for $39 and send in a $10 rebate form, you "paid" $39 but it only "cost" you $29.
Where to Find Invoice Prices and Secret Incentives
I recommend that you get the Fighting Chance package. They have the most up to date and accurate information for invoice prices and secret incentives. They charge $39.95 for the first vehicle and $15 for each additional vehicle. The package is well worth the cost especially since they will also give you a "coach" to help you through the process if needed.
Edmund's offers this information at no charge but it isn't always as accurate or up to date. Most of the services we talk about in Chapter 2 like CarWoo also list the information but the same caveat applies. At CarBuyingTips.com we always say to keep the old saying in mind, "you get what you pay for."
Calculating Your Offer
You will offer 3% - 5% above the dealer's true cost. Do not include destination charges or any fees when you add this amount. I have created a spreadsheet that will do all the calculations for you. Click here to download our free Offer Spreadsheet.
Offer Calculation Example
- Example Invoice = $19,922
- Example Holdback = $597 (3% of Invoice)
- Example MSRP = $22,385
- Example Destination Charge = $455
- Example Secret Factory to Dealer Incentive = $500
- Example Customer Rebate = $400
Dealer's Actual Cost = $19,922 (Invoice Price) - $500 (Incentive) - $597 (Holdback) = $18,825
Note: If you got the invoice price from the actual invoice instead of looking it up online you will need to subtract the destination charge as well.
Your Offer = $18,825 (Actual Cost) + $941 (5% of Actual Cost) = $19,766
Or, more simply $18,825 x 1.05 = $19,766
Now you add the $455 destination charge (which is a legitimate charge) and you get $20,221 before tax and registration. This is a very fair offer that gives the dealer a 5% profit. Don't forget about the $400 rebate. This is an incentive for you and does not effect the dealer's profit. Your final price should be $19,821 plus tax and registration.